Navigating the Labyrinth: Reg CF

Having navigated safely through Regulation D and Regulation A+, we approach the next ring of the labyrinth of rules and regulations. This one is is known by many names: Regulation CF, Regulation Crowdfunding, or Title III.

We’ve already covered how Reg D allows companies to raise literally unlimited money from primarily accredited investors, and Reg A+ allows companies to raise up to $20 million or $50 million from both accredited and eligible non-accredited investors. So what does Reg CF allow?

Reg CF, an amendment to Title III of the JOBS Act, allows non-accredited investors to invest in companies raising less than one million dollars annually. This rule came into existence because of the success of crowdfunding via platforms like Kickstarter and Indiegogo. What those kinds of platforms supplied – the ability for individuals and companies to present their products, projects, and visions to the world and raise money – represented a game-changer. (Kickstarter, which launched in 2009, has raised over $2.5 billion to date!) But companies found themselves unable, legally, to offer as a “perk” or “prize” a stake in the company. The best they could do was offer a product or service, sticker or T-shirt. The FEC’s rules prevented them from using this new fundraising form to hand out stocks or ownership in the company.

That this lack has been corrected is a big deal. Now, via Reg CF (and Reg A+), individuals besides the wealthiest members of society are able to participate in providing venture capital funds for a stake in a brave new startup. And startups are able to go straight to the public to raise money for their dreams and ideas.

Now, Reg CF has a few drawbacks. The biggest is that annual $1 million limit. Many companies need more than that at the beginning, which means they must either rule out Reg CF as an option, or use it in conjunction with another avenue of funding. (Blak Box Group specializes in guiding entrepreneurs and startups through combination fundraising paths and solutions; contact us for more info!) Additionally, legislation is already in the works to make Reg CF more attractive, and meanwhile, the dose of democracy it adds to early-stage investing is refreshing and exciting.

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