Crowdfunding is raising money in small amounts from a large number of people, usually online. Rewards-based crowdfunding, where backers receive a product or perk, is not a securities offering. Equity crowdfunding, where backers receive shares, SAFEs or other securities, is regulated by the SEC and is generally done under Regulation Crowdfunding (Reg CF), which currently lets an eligible company raise up to $5 million in a 12-month period through a single SEC-registered funding portal or broker-dealer.
Founders often treat “crowdfunding” as one thing, but the legal rules depend entirely on what backers receive. Here is how the main types work, what Reg CF requires, and how it compares with other ways to raise capital from the public.
Rewards-Based Crowdfunding
Platforms such as Kickstarter and Indiegogo let creators collect contributions in exchange for rewards, like an early version of a product. Because backers are not buying an investment in the company, these campaigns generally are not securities offerings. They still carry legal obligations: campaign descriptions must not be misleading, promised rewards must be delivered or refunded as the platform’s terms and consumer protection law require, and the funds are generally taxable income to the business. Founders should also be careful not to promise backers a share of profits or ownership, which could turn a rewards campaign into an unregistered securities offering.
Equity Crowdfunding Under Regulation Crowdfunding
Title III of the JOBS Act created a federal exemption that lets private companies sell securities to the general public, including non-accredited investors, online. The SEC’s rules took effect in 2016 and were significantly expanded by amendments effective in 2021.
How much can a company raise?
Under the current rules, an issuer may raise up to $5 million in Reg CF offerings in any 12-month period. Certain companies are ineligible, including non-U.S. companies, SEC reporting companies, investment funds and companies subject to “bad actor” disqualification.
Who can invest, and how much?
Anyone can invest, but the SEC limits how much non-accredited investors may put into Reg CF offerings across all issuers in a 12-month period, based on the greater of their annual income or net worth. Accredited investors are not subject to these limits. The investment limit thresholds are adjusted for inflation periodically, so check the SEC’s current figures before launching.
Intermediaries
Every Reg CF offering must be conducted online through a single intermediary registered with the SEC as either a broker-dealer or a funding portal, and a member of FINRA. Funding portals may not give investment advice, solicit purchases of the securities on their platform, or hold investor funds or securities. The intermediary must take steps to reduce the risk of fraud, including a background check on the issuer and its principals.
Disclosure: Form C
Before launching, the issuer files a Form C with the SEC and posts it on the platform. Form C describes the business and its management, risks, the target and maximum offering amounts, the intended use of proceeds, the price of the securities, the capital structure and the terms of the securities. Financial statements are required, and the level of review (attested to by the principal executive officer, reviewed by an independent accountant or audited) increases with the amount raised. Material changes require amendments, and investors receive the right to cancel their commitment within set periods.
Advertising and testing the waters
Outside the platform, an issuer’s advertising of an open offering is limited to a brief notice directing investors to the intermediary. The 2021 amendments also allow issuers to “test the waters” before filing a Form C, subject to conditions and legends. All communications remain subject to the antifraud rules.
After the offering
- Annual reports. Issuers generally must file an annual report on Form C-AR and post it on their website until a termination event occurs.
- Resale limits. Reg CF securities generally cannot be resold for one year, except to certain transferees such as the issuer, accredited investors or family members.
- Liability. The issuer, and in some cases its directors and officers, can be liable for material misstatements or omissions in offering materials.
- Cap table impact. A Reg CF round can add hundreds of small investors. Some companies use a crowdfunding vehicle (a special purpose entity allowed under the 2021 amendments) to hold the investments as a single line on the cap table; see our article on capitalization tables.
Reg CF securities are “covered securities,” so states cannot require registration, although some states may require a notice filing and fee.
Crowdfunding Compared With Other Exemptions
Rule 506(b) and 506(c)
Most venture-backed startups raise under Rule 506 of Regulation D, which has no dollar limit. Rule 506(b) prohibits general solicitation and allows up to 35 non-accredited but sophisticated purchasers, though including them triggers extra disclosure requirements. Rule 506(c), added under the JOBS Act, permits public advertising, but every purchaser must be accredited and the issuer must take reasonable steps to verify that status. A Form D is generally due within 15 days after the first sale; see our guide to Form D filings in California.
Who is an accredited investor?
For individuals, the familiar tests are net worth over $1 million, excluding the primary residence, alone or with a spouse or spousal equivalent, or income over $200,000 ($300,000 jointly) in each of the last two years with a reasonable expectation of the same this year. Since 2020, the definition also includes holders of certain professional securities licenses and, for a fund’s offerings, its “knowledgeable employees,” along with additional categories of entities.
Regulation A
Regulation A, sometimes called a “mini-IPO,” permits larger public offerings to non-accredited investors with more extensive disclosure and SEC qualification. It is more expensive than Reg CF but allows considerably larger raises. For a broader overview of options, see how to raise capital without registering with the SEC.
Is Equity Crowdfunding Right for Your Startup?
Reg CF can work well for consumer-facing companies with an engaged customer base, or founders without access to traditional angel and venture networks. Trade-offs include offering costs, ongoing reporting, public disclosure of financial information and a larger investor base to manage. Many campaigns use SAFEs or similar instruments, which are complex for retail investors and should be described carefully; see our article on SAFE notes.
The Takeaway
Rewards crowdfunding is largely a marketing and consumer-law exercise, while equity crowdfunding is a regulated securities offering. Reg CF opens fundraising to the public but comes with specific limits, disclosure obligations and ongoing reporting. Choosing between Reg CF, Rule 506 and Regulation A depends on how much you need to raise, who your investors are and how much compliance you can support.
Frequently Asked Questions
What is the difference between rewards and equity crowdfunding?
In rewards crowdfunding, backers receive a product or perk and are not buying an investment, so securities laws generally do not apply. In equity crowdfunding, backers receive securities, so the offering must comply with an exemption such as Regulation Crowdfunding.
How much can a startup raise through Regulation Crowdfunding?
Under current SEC rules, an eligible company can raise up to $5 million through Reg CF offerings in a 12-month period, using a single registered funding portal or broker-dealer.
Can non-accredited investors invest in startups?
Yes. Regulation Crowdfunding allows non-accredited investors to invest, subject to annual limits based on income and net worth. Regulation A offerings and limited numbers of sophisticated investors in Rule 506(b) offerings are other routes.
Can a startup advertise its fundraising?
It depends on the exemption. Rule 506(c) allows general solicitation if all purchasers are verified accredited investors, Reg CF allows limited advertising that directs investors to the platform, and Rule 506(b) prohibits general solicitation.
How Sutter Law Can Help
Sutter Law advises startups on choosing a fundraising exemption, preparing offering documents and complying with federal and California securities rules through our business financing practice. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
