Regulation Crowdfunding Issuer FAQ

Regulation Crowdfunding Issuer FAQ


Issuer FAQ

Q:     What is equity crowdfunding?

A: Regulation Crowdfunding (“Reg CF”), is a new securities exemption that enables start-up companies to raise seed-stage funding from the public. All Reg CF offerings must be facilitated through an online SEC and Finra registered intermediary, which come in the flavors of broker-dealers or “funding portals”. Before launching a campaign on the intermediary’s site, companies are required to disclose certain information about themselves and their offerings in a disclosure document called a Form C. The Form C must be filed with the SEC before the campaign goes live.

Q:     What types of companies are not eligible to rely on Reg CF?

A:     Certain companies are not eligible to use the Regulation Crowdfunding exemption. These include:

  • non-U.S. companies;

  • companies that already are Exchange Act reporting companies;

  • certain investment companies;

  • companies that are disqualified under Regulation Crowdfunding’s disqualification rules;

  • companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement; and

  • companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

  • Additionally, Rule 503 of Regulation Crowdfunding includes a “bad actor” disqualification provision which prohibits an issuer to rely on the Reg CF exemption if they have been convicted of or are subject to court or administrative sanctions for securities fraud or other violations of specified laws.

Q:     What is a disqualifying event?

A:     Under the final rules of Regulation Crowdfunding, a disqualifying event includes: certain criminal convictions, certain court injunctions and restraining orders, certain final orders of certain state and federal regulators, certain SEC disciplinary orders, certain SEC cease-and-desist orders, suspension or expulsion from membership in a self-regulatory organization (SRO), such as FINRA, or being barred from association with an SRO member; SEC stop orders and orders suspending the Regulation A exemption; and U.S. Postal Service false representation orders.

Q:     How much money can I raise for my business under Regulation Crowdfunding?

A:     Companies may raise up to $1,070,000 during a 12-month period. Pro tip: Companies looking to raise over the limit, may consider fundraising in “side-by-side” offerings, under Reg D, Rule 506(c) and Reg CF. Others may be better suited for another securities exemptions under the JOBS Act, such as Regulation A+.

Q:     What types of companies are good candidates for equity crowdfunding?

A:      Equity crowdfunding is industry agnostic and could be a useful fundraising strategy for many small businesses. We’ve worked with start-up companies in the Food & Beverage, Blockchain, Technology, Media, Fintech, Alcoholic Beverage, Social Impact and Fashion industries, as well as artists, restauranteurs, real estate developers and others. The exemption is appropriate for companies looking to streamline their seed stage financing round through an online marketing campaign and platform.

Q: Who is eligible to invest in a Reg CF offering?

A:     Regulation Crowdfunding allows companies to solicit investments from “the crowd”: both accredited and non-accredited investors. A non-accredited investor is any investor who does not meet the income or net worth requirements set by the SEC. In effect, this allows start-ups to generate seed capital quickly. Unlike a Regulation D offering, there is no restriction on the total amount of investors, however, Section 12(g) of the Exchange Act registration is required if an issuer, on the last day of its fiscal year, total assets greater than $25 million and the class of equity securities is held by more than 2,000 persons, or 500 persons who are not accredited investors.  

Q:  Are non-natural persons that invest in Regulation Crowdfunding offerings subject to investment limits?

A: Yes. The investment limits in Rule 100(a)(2) of Regulation Crowdfunding apply to all investors. Instead of calculating investment limits based on annual income and net worth, a non-natural person calculates the limits based on its revenue and net assets (as of its most recent fiscal year end). Source: SEC C&DI, available here.

Q:     What are the risks involved in equity crowdfunding?

A:     An unsuccessful Regulation Crowdfunding campaign may be detrimental to a business’s reputation. Moreover, in the event the company does not meet its target offering amount in Reg CF campaign, the company would have to refund its investors. Companies should assess whether an offline fundraising strategy may be more appropriate to reach their fundraising goal.

Q:  What are the financial disclosure requirements under Reg CF?

A:     Companies are required to disclose all pertinent past and future financial information, which includes:

o   the names of each person who is a beneficial owner of 20% or more of the issuer’s outstanding voting equity securities,

o   the price of the securities or the method for determining the price, and

o   the organization’s ownership and capital structure, among other disclosures.

Issuers are also required to provide financial statements in accordance with U.S. GAAP principles covering the two most recently completed fiscal years.

  • Companies offering $107,000 or less: financial statements and certain federal income tax returns need to be certified by the principal executive officer. If an issuer has reviewed financial statements or audited statements by a public accountant, those statements will need to be included.

  • Companies offering more than $107,000 but not more than $535,000: financial statements reviewed by a public accountant that is independent of the company are required.

  • First-time Regulation Crowdfunding companies offering more than $535,000: must provide reviewed financial statements. If, however, a Company has previously sold securities in reliance on Regulation Crowdfunding, the financial statements need to be audited by a public accountant.

Q:     What type of securities can my company offer in its Reg CF campaign?

A:      Issuers can offer various securities types, including common or preferred stock, debt, SAFEs, revenue sharing agreements, and convertible notes. Pro tip: Check with your funding portal to see if they have any restrictions on which securities it allows companies to offer on its site. Some funding portals do!  

Q:     Can I sell security tokens in a Reg CF offering?

A:     Yes! Like all issuers, STO issuers may register their security tokens with the SEC or utilize an exemption from registration to sell their securities. The JOBS Act exemptions are included!  Companies can thus tokenize ownership in their businesses or assets and sell security tokens under Reg CF, Reg D Rule 506(c) or Reg A+.  Reg CF is also an innovative solution for blockchain companies seeking to “airdrop” their tokens a compliant manner. Companies in the pre-sale phase of their STO, may also offer convertible securities that convert into tokens (e.g., SAFEs, Token DPA,). Click here to read more about security tokens offerings (STOs) and Republic Crypto’s Token DPA

Q:     What is a SAFE?

A SAFE is agreement that, similarly to a warrant, entitles investors to an equity position in the company in the future. Typically, the SAFE converts into equity when the company achieves a priced financing round in the future or IPO.  SAFEs do not have an interest rate, maturity date or repayment schedule.

Q:     What is a Convertible Note?

A: A Convertible Note is a debt instrument that typically converts into equity when the company completes a future priced financing round, upon a certain maturity date or IPO. This instrument allows investors to loan money to startup companies and, in return, receive equity in the company. If the company fails or if there is an early liquidation event, the creditors will be paid ahead of all equity holders.

Q:     How does a SAFE compare to a Convertible Note?

A: SAFE is an equity agreement and a Convertible Note is a debt instrument. A SAFE, unlike a debt instrument, does not carry any interest rate. Rather, it more simply a contract for future equity in the company. In contrast, a Convertible Note is a loan that converts into the company’s capital stock in the future. Holders of these instruments are likely i) not equal in the capital stack, ii) taxed differently, and iii) treated differently in a liquidation.

Q:     How does Republic’s Crowd SAFE differ from traditional SAFEs?

A:     Like traditional SAFEs, holders of the Crowd SAFE get a financial stake in the company when a certain “trigger event” occurs, such as the company’s acquisition or IPO. A Crowd SAFE differs from traditional SAFEs in that it allows companies to distinguish between major investors (who invest a threshold investment amount) and non-major investors, and establish a special shadow shares of conversion shares with limited voting and information rights. Further, if a company chooses to conduct a subsequent equity financing round, they may elect to “roll-over” SAFE holders and continue the terms of the Crowd SAFE or convert the Crowd SAFE holders into capital stock. A Crowd SAFE may be favorable to investors as well. For example, if there is a liquidity event, investors may have the option to have their cash returned or convert the security into stock. 

Q: What information can an issuer disseminate prior to filing the Form C with the Commission and providing it to the relevant intermediary?

A: Information not constituting an offer of securities may be disseminated by an issuer prior to the commencement of a Regulation Crowdfunding offering. For example, factual business information that does not condition the public mind or arouse public interest in a securities offering is not an offer and may be disseminated widely. The Commission has interpreted the term “offer” broadly and has explained that “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer…” Securities Offering Reform, Release No. 33-8591 (July 19, 2005). See also Securities Act Rule 169 and Securities Act Rule C&DI 256.25. Regulation Crowdfunding, however, does not provide an exemption for the dissemination of information that constitutes an offer of securities by an issuer prior to the issuer filing a Form C with the Commission and providing it to the relevant intermediary. Source: SEC C&DI, available here.

Q:  May an issuer advertise the “terms of the offering” under Regulation Crowdfunding?

A:  Yes, but any such advertising that is made other than through communication channels provided by the intermediary on the intermediary’s platform will be limited to notices that include no more than the information described in Rule 204(b) of Regulation Crowdfunding. “Terms of the offering” is defined to include “the amount of securities offered, the nature of the securities, the price of the securities and the closing date of the offering period.” See Instruction to Rule 204. Source: SEC C&DI, available here.


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