Raising money through Regulation A & Regulation CF
Over the years, one of the most important questions entrepreneurs and innovators occupied themselves with was “how to raise money to fund my project\company?”. Before 2013 the answer to this question was quite limited and consisted of two main options:
- Finding private investors who would agree to put their money in a project as a loan or in exchange for equity. This option was relevant for the lucky few who were able to find an “Angel Investor” who would agree to provide the initial necessary capital to push the company forward.
- Enlisting in the stock market in hope to raise the needed sum from the public. This option proved rather expensive and subjected the company to heavy regulation by the authorities.
Following the JOBS Act in 2013, the American government provided new possibilities for entrepreneurs and companies to raise money through Regulation CF (Crowd Funding) and Regulation A, while the SEC published the Investment crowdfunding rules in October 2015.
The most meaningful change presented in these rules is the possibility to raise money in exchange for capital (shares), rather than for a promise of a product or service.
As previously mentioned, the possibility to raise money through crowd funding was enabled through the JOBS Act approved be the Obama administration in 2013 with the intent to improve the American economy and to create more jobs. One of the main objectives of Regulation A\CF was to enable small and medium sized companies to raise money and to grow, thus creating more jobs for the American people. As a result, one of the basic requirements for companies applying for Regulation A\CF is that they must be incorporated in the US, employ workers in the US and their center of operations is in the US. Thus for example, a foreign company that wants to apply for Regulation A\CF must first incorporate another company that is based in the US and has employees in the US.
In order to use these methods, there are a few restrictions for certain types of companies, the most relevant being for foreign companies – the issuer must be incorporated and have their principal place of business in the US or Canada.
What are the main differences between Regulation A and Regulation CF?
| Regulation CF | Regulation A – Tier 1 | Regulation A – Tier 2 | |
| Amount per year | 1 Million USD | 20 Million USD | 50 Million USD |
| Non-Accredited investors | Yes | Yes | Yes |
| Limits on investors | If the income is under 100,000$ investment can be up to 2,000$ or 10% of income (the lower of the two). | No | For non-accredited, 10% of income or net worth, whichever is greater, per offering. |
| Audited financial statements | No | No | Yes |
| Registration with SEC | Yes | Yes | Yes |
| Registration with the state | Yes | Yes | No |
| Excluded from the Exchange Act limits | Yes | Yes | Yes |
| Freely tradable shares | Yes | Yes | Yes |
| Post offering reports | No | No | Yes |
| Online distribution | Yes | Yes | Yes |
| “Bad Actor” limitation | Yes | Yes | Yes |
As stated in the table above, there are three levels of fundraising through Regulation A & CF. The first level is through Regulation CF, through which it is possible to raise up to 1 million USD annually. This is the simplest of the three and as such it requires the fewest reports to the SEC and the tax authorities. In order to be confirmed for Regulation CF, the company must file a form electronically. In this form the company will state information regarding the company employees, offices, directors, owners of 20% share capital or higher, price of the offered shares and the financial state of the company including Financial Reports.
The second and third levels are through Regulation A, and the main difference between them is that Tier 2 requires a higher level of reporting. In addition, companies that are looking to fundraise through Tier 2 are required to file semi-annual financial reports and to notify the authorities on various actions in the company (similarly to regular publically traded companies).
How does it work?
Fundraising through Regulation CF\A is possible from two main types of investors:
- Private investors who accumulated some money over the years, and are looking for diversity in their investment portfolio through appealing ideas. This kind of investors is likely to invest relatively small sums of money.
- Professional investors such as investment banks, that recognize the potential in a company or product and are looking to invest large sums for higher future gain.
In order to reach investors, after filing all needed documents and being approved for Regulation CF\A, the company can be listed in one of the SEC approved platforms and make the desired offering to the public. As of October 2016, there are 17 platforms, while some of them specialize in specific areas. For example, a platform called IndieCrowdfunder specializes in entertainment.
Michael Lulko
Dov Weinstein & Co.
C. P. A
