A little over five years ago, the Regulation Crowdfunding statute was written into U.S. law.
To say that it affected the way we invest is a phenomenal understatement. In 2020 alone, 1035 companies raised $214.9 million via Reg CF—a 91% and 105% increase, respectively, from 2019.
While these numbers are impressive, the real value of Reg CF lies in the fact that 1) it has opened the gates, doors, and windows for any person looking to redirect investment dollars, particularly in the realm of real estate since last year, and 2) it has made it easier for issuers (developers and business owners) to fund their projects.
For Vicinity, Reg CF meant that we could pursue our dream of connecting local ventures with local people to empower local economies.
In early 2020 we ran the regulatory gauntlet and registered as a funding platform with the SEC, becoming an official member of FINRA. More importantly, we’ve worked to help businesses and investors build trust as they invest in their communities.
While Reg CF is no walk in the park, after a few years of deep research, expert conversations, and a few hard knocks, our team is happy to serve as your tour guide, keeping you on the compliance straight and narrow.
Today’s article outlines the most important Reg CF rules you need to know before raising money. By the time you finish reading, you should have a good grasp of the compliance basics, including issuer eligibility, disclosure requirements, advertising restrictions, and much more.
Let’s dive in!
What Is Regulation Crowdfunding?
Looking to talk Reg CF shop at a dinner party?
Here’s your headline:
In its simplest form, the statute allows (almost) anyone to invest and receive investments. As an issuer, you can let the public invest without going public.
It provides an exemption from the registration requirements of Securities Act Section 58 for certain crowdfunding transactions. Under specific circumstances, people can invest in previously inaccessible investment opportunities so long as all parties comply with a few rules. As mentioned in the opening paragraphs, this statute has had a poignant, democratizing impact on real estate investing, especially with recent amendments to increase funding limits (more on those below).
Yes, Reg CF has its twists, turns, and technicalities.
In fact, we’ve talked about some of them in a previous article. However, we are not going to get into the technical nitty-gritty of the law in today’s article. If you want to study the statute, as dictated by U.S. Code, you can read it here. And if that doesn’t put you to sleep, the SEC also has an exhaustive document that goes over every detail of the law (even a bit of history).
Compliance With Reg CF: 5 Points of Focus
You don’t have to become a full-blown SEC regulatory and compliance nerd like us to run a successful Reg CF offering. What you should have is a basic understanding of the five points below. These are some of the most important topics for issuers to understand before starting a funding campaign.
1. Issuer Eligibility
To begin, Reg CF doesn’t mean that anyone can just publish a deal and request investments.
To be eligible as a new issuer, you need to check a few boxes first—here are some of the most relevant. An issuer must:
- Be established within the United States, but cannot be an investment company (defined by the Investment Company Act of 1940).
- Not have been previously disqualified to offer or sell securities.
- Have a specific business plan.
Again, these requirements are not exhaustive and have their nuances. But these are absolute musts when offering an investment deal through regulation crowdfunding.
2. Offering Amounts and Offering Term
Reg CF also limits how much an issuer can raise from investors: $5 million over a 12-month period.
Keep in mind that this is in total, and the limit includes all investors across all offerings. So, if you raise $1.5 million for a certain deal in seven months, you can raise another $3.5 million in the following four months. Note that so long as you comply with the offering amount rule, there’s no limit concerning the number of opportunities that you can offer.
There is another limitation, only for non-accredited investors, regarding each individual investment (accredited investors have no limits). And although this isn’t something that you can control yourself directly, it’s important to know.
For non-accredited investors, within a 12-month period:
- If an investor’s annual income or net worth is less than $124,000, they can’t exceed $2,500 or 5% of their annual income or net worth, whichever is greater.
- If both the investor’s annual income and net worth are equal to or more than $124,000, they can’t exceed $124,000 or 10% of their annual income or net worth.
This rule, although a limitation, protects everyday investors while still giving them a seat at the table. Investing is no longer only for the very wealthy. With Reg CF, non-accredited investors are now eligible to participate in opportunities that were only previously available to accredited investors.
3. Use of Intermediaries and Funding Portals
One of the key investor protections of Reg CF is that all offerings and transactions must be conducted exclusively through an SEC-registered platform, which in turn can only be operated by a registered broker-dealer or a funding portal that’s also a member of FINRA.
This, of course, means that issuers can’t place offerings on their own. Sorry, no Craigslist crowdfunding under the SEC’s watch. In addition to bringing security to the investors, this requisite also helps put the “crowd” in crowdfunding: a deal can’t happen unless there’s a community around it.
As an intermediary platform, Vicinity has a few dos and don’ts to follow. On one hand, we (and all intermediaries) must:
- Provide investors with educational materials and information about the issuer and the offering.
- Take measures to reduce the risk of fraud.
- Provide communication channels to permit discussions about offerings on the platform.
- Facilitate the offer and sale of crowdfunded securities.
On the other hand, we must not:
- Offer investment advice or make recommendations.
- Solicit purchases, sales, or offers to buy securities offered or displayed on the platform.
- Possess or handle investor funds or securities.
For both issuers and investors, partnering with the right funding portal can make or break their investing experience. As much as investing is about making returns and fully funding offerings, building community and trust can be just as important—none of this can be possible without sticking to the rules.
4. Issuer Disclosures
For an offering to be available, issuers must also offer certain information about their venture, to make sure that they are legitimate and accountable. Some of the information that issuers must file with the SEC and provide investors with includes:
- Names and positions of the directors of the issuer, how long they served in the position, and their business experience during the past three years.
- A description of the business of the issuer and its anticipated business plan.
- The current number of employees of the issuer.
- The target offering amount and the deadline to reach the target offering amount, and what happens if the target isn’t reached.
- Whether the issuer will accept investments in excess of the target offering amount.
- A description of the purpose and intended use of the offering proceeds.
- A discussion of the issuer’s financial condition and financial statements.
Although there are a bit more details that issuers must provide, this is a first approximation to understand whether you could comply with the requirements.
5. Advertising and Marketing Requirements
Finally, it’s also important to keep in mind the Reg CF advertising requirements.
Once you know the rules around compliance and partner with a registered intermediary, you’ll realize that marketing a Reg CF campaign offers advertising opportunities that are not available with other securities offerings. This can be a great tool to engage your community and get the word out to investors of all sizes.
As we mentioned, Reg CF offerings can only happen through a funding platform, and the same rule applies to offering communications (with some exceptions). The idea behind this provision is that all information regarding an offering should be centralized—a single source of truth, if you will.
In short, issuers have the responsibility of keeping all of an offering’s details on the funding portal that is facilitating the offering. This rule provides investors with the peace of mind that there’s no extra information hiding in the dark recesses of the interwebs. Rather, what you see on a funding portal offering is exactly what you get.
Your offering page will be the “monopoly of information” about your deal, but you can also use many other avenues for advertising your deal. With any other medium, you need to stick to two types of communications.
First, “no terms” communications. These exclude “terms of the offering,” meaning they avoid:
- The amount of securities offered.
- The nature/type of the securities (if they are debt, equity, etc.).
- The price of the securities.
- The closing date of the offering period.
Of course, your normal business advertising is still fine, and feel free to ramp it up once your Form C is filed.
Next, “terms” communications. If we dub the “no terms” comms as soft, “Terms” comms are just the hard facts. And pretty specific facts at that. These types of “notices” are limited to:
- A statement that you are conducting an offering pursuant to Section 4(a)(6) of the Securities Act.
- The name of your intermediary (that’s us!) and a link to the platform.
- The terms of the offering (yep, same terms we avoided above).
- The following factual information: name of the issuer, address, phone number, website, email address of an issuer representative, and a brief description of the business.
You don’t have to include all or even some of these for this type of communication, but don’t include anything else. No other links. Don’t embed this into another communication. It needs to be a standalone “notice.” Don’t talk about “growth,” “success,” or “progress” here. That can go on the “no terms” communications.
Your competitive advantage here is finding a funding platform that clearly connects with potential investors, and is particularly keen on describing offerings and the opportunities they hold. At Vicinity, we are your partner in marketing—helping to both advertise your deal and keep you compliant in the process.
Facts are facts, but how you communicate them can make a world of difference—after all, you need to catch investors’ interest. At Vicinity, for example, we make it a point to connect with investors, and clearly highlight the value proposition as well as the risks of each of the offerings that we publish.
You can check out some of our deals here to get an idea of how we promote each one.
Offer and Invest With Vicinity
And there you have it—Reg CF compliance in a nutshell!
At Vicinity, we believe in the power of investing locally. Do you share this mission? Are you interested in learning more about Reg CF? If so, we have the subject matter experts you need to launch a successful offering.
Contact us today to speak with one of our Reg CF experts, or register directly and start connecting with your local investors.