Regulation CF is short for Regulation Crowdfunding. But what is it, and why is it so significant? To answer these questions, we need a short history lesson.
For many years, start-ups were heavily restricted when looking to raise capital. One of the only options for entrepreneurs was through accredited investors – essentially a small percentage of very wealthy Americans. But in 2012, that all changed with a landmark piece of legislation called The JOBS Act, which launched equity crowdfunding as we know it today.
In 2016, a few years after the JOBS Act was signed into law, Regulation CF went into effect, allowing private early-stage companies to raise money from all Americans. These companies can now use equity crowdfunding platforms like Fundit to get access to many different investors, rather than a select few.
But what does this mean in practice? In essence, equity crowdfunding platforms like Fundit enable entrepreneurs to raise capital from the crowd through the sale of securities. It’s democratizing the investment process, giving everyone the opportunity to have a piece of the pie.
For investors, the process of investing in equity crowdfunding is straightforward, but there are some considerations to bear in mind.
For example, the U.S. Securities and Exchange Commission (SEC) requires all transactions under Regulation CF to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal like Fundit.
The SEC only allows a company to raise a maximum aggregate amount of $1,070,000 through crowdfunding offerings within a 12-month period. Additionally, securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year.
There is also a limit on the amount individual investors can invest across all crowdfunding offerings in a 12-month period, which is dependent on your net-worth and annual income.
According to the SEC, if either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth. However, if your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000.
Taking into consideration these rules, it’s clear that equity crowdfunding is much more than simply just posting an offering and raising capital on a website. There is a rigorous process that happens behind the scenes, where certain criteria must be met, and rules must be followed.
*Nothing in this article should be considered legal or investment advice. Startup investments are always inherently risky and following the advice in this article will not necessarily reduce that risk.