What is Regulation Crowdfunding (Reg CF)?
For over 80 years, private companies could only raise capital (i.e. money) from accredited investors. Accredited investors historically have comprised a small percentage of Americans. This all changed, however, when President Obama signed a piece of legislation called the JOBS Act on April 5th, 2012. The JOBS Act allows entrepreneurs to go to the crowd and publicly solicit or advertise their capital raises. Four years after the JOBS Act was signed, Title III (aka Regulation CF) of the JOBS Act went into effect in 2016, allowing private early-stage companies to raise money from all Americans, regardless of background or wealth.
Regulation Crowdfunding (Reg CF), is an offering type (technically, an “exemption” from securities registration requirements of the SEC) that allows private companies to raise up to $5 million every 12 months. Like a Kickstarter campaign, Reg CF allows companies to solicit funding online from their earliest adopters. Instead of rewards like a sticker, piece of clothing, or a product, investors in Reg CF companies receive securities, typically equity, in the startups they support and have the opportunity to back more than just a product, but also in a business. Because of the lower capital raise limit, companies raising under Reg CF tend to be earlier stage companies, and have lower valuations.
Examples of other exemptions that businesses may use to raise capital in the private markets include Reg A (accredited and non-accredited), Reg D Rule 506(b), Reg D Rule 506(c), and Reg D Rule 504 (less common).
Investor Limits under Reg CF (updated in 2021)
Reg CF offerings, however, limit the amount investors can invest in Reg CF startups every 12 months based on your income and net worth.
For Reg CF investors who have either a net worth or income less than $124,000, then your limit is:
- The greater of $2,500 or 5% of the greater of your income or net worth
For Reg CF investors who have both their net worth and income greater than $124,000, then your limit is:
- 10% of your annual income or net worth, whichever is greater – but not to exceed $124,000
If you are an accredited investor investing in a Reg CF deal, then there is no limit on how much you can invest.
The SEC updated these limits in March 2021 to be more generous to investors vs. the prior rules, which were more restrictive.