Regulation Crowdfunding

Regulation Crowdfunding (Reg CF), created by the JOBS Act of 2012, is an exemption from Securities Act of 1933 registration that allows companies to raise up to $5 million per year from unlimited investors (accredited and non-accredited alike) through SEC-regulated online platforms. Reg CF has democratized early-stage capital access, allowing startups without venture capital connections to raise from the public.

The democratization of capital

Regulation Crowdfunding fundamentally changed fundraising. Before Reg CF (2015, when SEC rules were finalized), a startup founder needed connections to angels or venture capitalists. Reg CF opened the door to internet-based fundraising — a founder could post an offering on AngelList, Republic, StartEngine, or Wefunder, and attract capital from thousands of small investors online.

This democratized capital access. Women, minorities, and founders in non-tech regions suddenly had fundraising tools previously unavailable to them. However, it also introduced retail investors to high-risk early-stage investments, creating fraud and failure risks.

The Reg CF exemption: Form C

To launch a Reg CF offering, a company files Form C with the SEC, disclosing the business, financial condition, use of proceeds, and risks. The disclosure is lighter than Securities Act of 1933 registration (no audited financials required for most companies, no detailed executive compensation, etc.). The SEC does not review or approve the Form C; it is simply notified.

The company then posts the Form C on a registered funding portal (a platform regulated by FinCEN and the SEC). The platform hosts the offering, collects commitments from investors, and raises capital. If the offering reaches its target, the company takes the money. If not, the offering fails and investors’ money is returned.

The $5 million cap and annual limit

The exemption caps at $5 million per year. A company cannot do multiple Reg CF offerings to exceed this. The cap is meant to limit the risk to retail investors — a company raising more than $5 million is assumed to be more substantial and should pursue a Reg A+ or full IPO.

The limit also applies across multiple platforms — if a company raises $3 million on AngelList and attempts to raise another $3 million on Wefunder in the same year, the second platform should refuse (though enforcement is spotty).

Investor protection limits and accredited/non-accredited

Reg CF allows both accredited and non-accredited investors to participate, which democratizes access but increases retail investor risk. To protect retail investors, Reg CF limits how much a non-accredited investor can invest in offerings in a 12-month period. Non-accredited investors can invest the greater of $2,500 or 10% of their income or net worth, whichever is lower.

Accredited investors have no such limit. This tiered approach assumes that wealthy, sophisticated investors can take bigger risks.

The platforms and fraud risk

Reg CF offerings are hosted on registered “funding portals,” which are essentially online brokers. As of 2024, dozens of platforms exist (AngelList, Republic, StartEngine, SeedInvest, Wefunder, etc.). The platforms are responsible for verifying investor identity and accreditation but are not underwriters — they do not vet the quality of offerings.

This has created a fraud risk. Some offerings are outright scams; many are just failed businesses. The SEC has brought enforcement actions against fraudulent issuers but cannot catch everything. Retail investors have lost significant money.

Resale restrictions and illiquidity

A major drawback of Reg CF securities is illiquidity. The securities cannot be publicly resold without registration, so an investor who buys equity in a Reg CF offering typically cannot sell for years (unless the company is acquired or IPOs). Secondary markets (such as SharesPost and Forge) have emerged to allow resale, but trading is thin and pricing is opaque.

This illiquidity means Reg CF investors should expect to hold indefinitely, similar to angel investment in a private company.

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