Definition
Regulation Crowdfunding is a SEC financial regulation that permits small businesses to offer and sell securities through crowdfunding. This rule, enacted in the US in 2016, allows these businesses to raise money from the general public, not just accredited investors. It makes it possible for individuals to become investors and take equity or debt positions in these enterprises.
Key Takeaways
- Regulation Crowdfunding is a part of the Securities Act under which eligible companies are allowed to offer and sell securities through crowdfunding. It limits the amount of money an issuer can raise and impose disclosure and other requirements on the issuer and intermediaries facilitating such crowdfunding.
- It has a cap on the total funds that a company can raise through this method in a year – currently, it’s capped at $5 million from the public. Individual investors, based on their income and net worth, also have a limit on the amount they can invest in a year through crowdfunding investing.
- Regulation Crowdfunding mandates the involvement of an intermediary, either a broker-dealer or a funding portal, registered with the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA). The intermediaries are obligated to provide investors with educational materials, take measures to reduce the risk of frauds, and make issuer information available on its platform.
Importance
Regulation Crowdfunding is an integral part of finance as it broadens the scope of investment by allowing startups and small businesses to raise funds from a large pool of individuals.
Before this regulation was implemented by the Securities and Exchange Commission (SEC) under the 2012 JOBS Act, only accredited investors (high net worth individuals, banks, and other financial institutions) were allowed to invest in these early-stage companies.
Regulation Crowdfunding democratized the investment process, permitting anyone regardless of income or net worth to invest in potential growth companies and thus fostering innovation, supporting job creation, and enabling mainstream investors to contribute directly to the economy.
Also, it provides businesses with a new route to secure funding while keeping in place protections for investors.
Explanation
The primary purpose of Regulation Crowdfunding is to simplify and democratize the fundraising process, particularly for small businesses and startups. It is intended to make capital more accessible to startups as well as expand investment opportunities for investors.
Under the traditional model of fundraising, startups and small businesses could face multiple challenges as they navigate through stringent rules to solicit funds from investors. However, with Regulation Crowdfunding, these businesses can pitch their business propositions and ideas directly to the public, in exchange for capital to run or expand their operations.
Regulation Crowdfunding is especially used in a modern fundraising method known as crowdfunding. This implies the method where businesses raise small amounts of funds from a large number of people, usually via internet platforms.
It offers an alternative to the traditional funding sources, and the main advantage is the ability to solicit investments from virtually anyone, as long as they adhere to the prescribed limits. Therefore, this regulation not only incurs benefits for small business owners, but it also paves the way for everyday people to become investors and potentially benefit from their financial contributions to these businesses.
Examples of Regulation Crowdfunding
Regulation Crowdfunding, also known as Reg CF, is a result of the 2012 JOBS Act and allows for equity crowdfunding by small businesses directly towards investors. Here are three real-world examples:
Atlas Motor Vehicles: Atlas Motor Vehicles is an automobile technology company that crowdfunded its development using Regulation Crowdfunding. They took this route in order to seek investors interested in their product, an electric pickup truck. The campaign was launched on the crowdfunding site, StartEngine, and successfully raised the funds needed.
BrewDog USA Inc: A leading example in the craft brewing industry, BrewDog USA Inc successfully raised funds via Regulation Crowdfunding on the platform BankRoll. Crowdfunding allowed them to expand their facilities and production capabilities.
Beta Bionics: A medical technology company, Beta Bionics utilized Reg CF to raise funds for the iLet, a bionic pancreas system designed for people with type 1 diabetes. Their crowdfunding campaign on Wefunder surpassed their initial goal, showing the public’s excitement and belief in their product.
FAQs on Regulation Crowdfunding
1. What is Regulation Crowdfunding?
Regulation Crowdfunding is a financial policy by the Securities and Exchange Commission (SEC) that allows eligible companies to offer and sell securities through crowdfunding. This is typically carried out online through a platform that allows a large number of individuals to raise funds for their initiatives.
2. Who can use Regulation Crowdfunding?
Businesses that are eligible and verified can use Regulation Crowdfunding. However, certain companies are not eligible such as foreign companies, public reporting companies, investment companies, and any company that has failed to comply with annual reporting requirements under Regulation Crowdfunding in the past two years
3. How much can be raised under Regulation Crowdfunding?
Companies can raise a maximum aggregate amount of $1.07 million through crowdfunding offerings in a 12-month period.
4. What kind of securities can be offered?
Various types of securities can be sold such as equity securities, debt securities, and securities convertible into or exchangeable for equity securities can be offered.
5. What are the disclosure requirements under Regulation Crowdfunding?
Companies that want to use Regulation Crowdfunding for their fundraising effort must file certain information with SEC and provide this information to investors and the intermediary facilitating the crowdfunding offer. The information can include details about the company, its financial condition, the nature of the securities being offered and the security holders.
Related Entrepreneurship Terms
- Securities and Exchange Commission (SEC)
- Investor Protection
- Equity Crowdfunding
- Startup Financing
- Crowdfunding Platforms
Sources for More Information
- U.S. Securities and Exchange Commission (SEC): It provides a detailed explanation of Regulation Crowdfunding as part of its rules and regulations.
- Financial Industry Regulatory Authority (FINRA): This is a non-governmental authority that offers keen insights into securities regulation including Regulation Crowdfunding.
- Crowdfund Insider: This online publication covers various aspects of crowdfunding globally including Regulation Crowdfunding.
- Investor.gov: This is the SEC’s site for individual investors that provides resources and guides about various investment topics including Regulation Crowdfunding.
