Understanding FTC & SEC Requirements for Crowdfunding

For startups and small businesses looking to raise capital, crowdfunding has emerged as a powerful alternative to traditional financing. However, to protect investors and maintain market integrity, crowdfunding activities in the United States are subject to specific regulatory requirements.

What is Regulation Crowdfunding?

Regulation Crowdfunding (Reg CF) was established under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012. It provides an exemption from the registration requirements of the Securities Act, allowing eligible companies to offer and sell securities through crowdfunding.

Key Requirements for Companies Raising Capital

1. Fundraising Limits

Companies can raise a maximum of $5 million through Regulation Crowdfunding in a 12-month period. This increased limit (up from the original $1.07 million) took effect in recent updates to the regulations.

2. Required Use of Registered Platforms

All Regulation Crowdfunding transactions must take place exclusively through an online platform operated by an SEC-registered intermediary, either a broker-dealer or a funding portal that is also registered with FINRA.

3. Disclosure Requirements

Companies must file Form C with the SEC before starting a crowdfunding campaign. This form requires disclosure of:

• Information about officers, directors, and 20% or greater shareholders
• Business description and business plan
• Intended use of proceeds
• Target offering amount and deadline
• Price of the securities or method for determining the price
• Ownership and capital structure
• Financial statements (requirements vary based on offering size)
• Related-party transactions
• Risks specific to the company or its business

4. Financial Statement Requirements

The level of financial disclosure required depends on the amount being raised:

Offering Amount	Financial Requirements
$124,000 or less	Financial statements and specific tax return information certified by the principal executive officer
$124,000.01 to $618,000	Financial statements reviewed by an independent public accountant
$618,000.01 to $5 million	For first-time crowdfunding: reviewed financial statements; for subsequent offerings: audited financial statements

5. Annual Reporting

Companies that have successfully completed a Regulation Crowdfunding offering must file an annual report (Form C-AR) with the SEC and post it on their website within 120 days after the end of each fiscal year.

6. Restrictions on Resale

Securities purchased in a crowdfunding transaction generally cannot be resold for one year, except in certain limited circumstances.

Investor Limitations

To protect investors, Regulation Crowdfunding limits how much individuals can invest across all crowdfunding offerings in a 12-month period:

• If an investor's annual income or net worth is less than $107,000, they can invest the greater of $2,200 or 5% of the lesser of their annual income or net worth.
• If both annual income and net worth are at least $107,000, the limit is 10% of the lesser of their annual income or net worth.
• No investor can invest more than $107,000 across all Regulation Crowdfunding offerings in a 12-month period, regardless of income or net worth.
• Accredited investors have no investment limits under updated regulations.

Ineligible Companies

Not all companies can use Regulation Crowdfunding. The following are ineligible:

• Non-U.S. companies
• Exchange Act reporting companies
• Certain investment companies
• Companies disqualified under "bad actor" provisions
• Companies that have failed to comply with annual reporting requirements in the prior two years
• Companies with no specific business plan or whose plan is to merge with an unidentified company

FTC Oversight of Crowdfunding

While the SEC regulates securities-based crowdfunding, the Federal Trade Commission (FTC) oversees other forms of crowdfunding, particularly regarding deceptive practices:

• The FTC monitors platforms like Kickstarter and GoFundMe for false advertising or misleading claims
• The agency can take action against fraudulent campaigns that deceive consumers
• The FTC provides consumer education about crowdfunding risks and how to identify potential scams

Alternative Exemptions

Beyond Regulation Crowdfunding, companies seeking to raise capital should be aware of other exemptions:

Regulation D

Rule 506(b) allows private fundraising from people with existing relationships, while Rule 506(c) permits public fundraising but limits to accredited investors only.

Regulation A+

Allows companies to raise up to $50 million from both accredited and non-accredited investors with different disclosure requirements.

Real-World Examples

Several companies have successfully used Regulation Crowdfunding to raise capital:

• BrewDog: The craft brewery used equity crowdfunding to expand operations, turning investors into brand advocates.
• Pebble: Although using a reward-based model, Pebble's smartwatch campaign raised over $10 million on Kickstarter, demonstrating the potential of crowdfunding.

Best Practices for Compliance

• Work with experienced securities attorneys familiar with crowdfunding regulations
• Choose a reputable funding portal with a track record of successful campaigns
• Be transparent about all aspects of your business and offering
• Develop a realistic funding goal and business plan
• Prepare all required disclosures before launching your campaign
• Budget for ongoing compliance costs, including annual reporting

Conclusion

Regulation Crowdfunding offers startups and small businesses an innovative way to raise capital while providing investor protections. Understanding and complying with SEC and FTC requirements is essential for successful fundraising campaigns and avoiding regulatory issues.

For the most current information, always consult with a securities attorney and visit the official SEC and FTC websites.

DISCLAIMER: This information is provided for educational purposes only and does not constitute legal advice. The laws and regulations governing crowdfunding are complex and subject to change. Always consult with a qualified attorney for guidance specific to your situation before proceeding with any fundraising activities.