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Reg CF vs Reg D Offerings – Comparing Syndication Structures

By: Tilden Moschetti, Esq.

Reg CF and Reg D are two options for startups and small businesses looking to raise capital through syndication. Both options allow companies to offer securities to the public, but there are significant differences between the two that make them better suited for different types of companies and situations. In this article, we’ll take a closer look at both Reg CF and Reg D, compare and contrast the two options, and discuss which one may be best for your business.

Reg CF, or Regulation Crowdfunding, is a relatively new option for companies looking to raise capital. It was created as part of the JOBS Act of 2012 and went into effect in 2016. Under Reg CF, companies can raise up to $5 million in a 12-month period from both accredited and non-accredited investors. This means that anyone can invest, regardless of their net worth or income. In order to raise capital under Reg CF, companies must file a Form C with the SEC and provide certain disclosures to investors. There are also specific ongoing reporting requirements that companies must comply with.

Reg CF Registered Portals

A Reg CF registered portal, also known as a crowdfunding portal, is an online platform that is registered with the Securities and Exchange Commission (SEC) to facilitate offerings under Regulation Crowdfunding (Reg CF). These portals act as intermediaries between companies looking to raise capital and investors looking to invest in those companies.

Reg CF registered portals are required to comply with a number of regulatory requirements, such as conducting background checks on the companies and officers, providing educational materials to investors, and ensuring that the companies comply with the SEC’s offering and ongoing reporting requirements. In addition, the portals are subject to ongoing regulatory oversight by the SEC to ensure compliance with the securities laws.

Reg CF registered portals are also responsible for handling the transfer of funds between investors and companies, and for maintaining records of the securities transactions. They also provide a platform for investors to communicate with the companies and other investors.

Comparison of Regulation Crowdfunding and Regulation D

Reg CF (Regulation Crowdfunding) and Reg D (Regulation D) are two options for startups and small businesses looking to raise capital. Both options allow companies to offer securities to the public, but there are significant differences between the two that make them better suited for different types of companies and situations.

Differences between Reg CF and Reg D in terms of the amount of money that can be raised

Reg CF (Regulation Crowdfunding) and Reg D (Regulation D) have different rules and limitations on the amount of money that a company can raise.

Under Reg CF, companies can raise up to $5 million in a 12-month period from both accredited and non-accredited investors. This means that anyone can invest, regardless of their net worth or income wherever thy are (unlike Rule 147A offerings). This can be a great option for companies that are looking to raise a relatively small amount of money and don’t want to go through the more rigorous process of an initial public offering (IPO).

On the other hand, Reg D has no limit on the amount of capital that can be raised, but it only allows raising capital from accredited investors only (for Rule 506c). Accredited investors are individuals with a net worth of at least $1 million (excluding the value of their primary residence) or annual income of at least $200,000 (or $300,000 if married). This can be a great option for companies that are looking to raise a significant amount of money and don’t mind the increased regulatory burdens and costs of Reg CF. Additionally, because the regulatory burdens and costs are less than with Reg CF, this can be a more cost-effective option for companies.

It’s worth noting that Reg D is divided into three different exemptions: Rule 504, Rule 505, and Rule 506. Each of these exemptions has its own requirements, but all of them allow raising an unlimited amount of money.

Differences between Reg CF and Reg D in terms of the types of investors that can participate

Under both Reg CF and Reg D, companies can raise money from both accredited and non-accredited investors. Accredited investors are individuals with a net worth of at least $1 million (excluding the value of their primary residence) or an annual income of at least $200,000 (or $300,000 if married).

Non-accredited investors can also participate in a Reg CF offering, regardless of their net worth or income. But, individuals with an annual income or net worth less than $100,000 are restricted to investing a maximum of $2,000 or 5% of their net worth or annual income (whichever is lower) in the Reg CF offering.

Non-accredited investors can only participate in Reg D Rule 506b offerings and only up to 35 in any 90-day period.

Differences between Reg CF and Reg D in terms of the level of disclosure and reporting required

Reg CF (Regulation Crowdfunding) and Reg D (Regulation D) have different rules and limitations on the level of disclosure and reporting required for companies looking to raise capital.

Under Reg CF, companies are required to file a Form C with the SEC and provide certain disclosures to investors, such as information about their business, financial condition, and the use of proceeds from the offering. They must also provide ongoing reporting requirements, such as annual and semiannual reports to the SEC and investors. These requirements are designed to provide transparency and protect investors, but they can be time-consuming and expensive for companies to comply with.

On the other hand, Reg D exemptions have less extensive disclosures and ongoing reporting requirements. Rule 504, Rule 505, and Rule 506 are the three exemptions under Reg D, each of them has its own requirements, but all of them generally require less extensive disclosures and ongoing reporting than Reg CF. However, companies will still be required to provide some level of disclosure and reporting to the SEC, but the level of detail and frequency of the reports will vary depending on the specific exemption used.

It’s worth noting that the level of disclosure and reporting under Reg D may vary depending on the specific exemption used, and it’s important for companies to consult with syndication attorneys to understand the specific requirements of the exemption they plan to use.

Differences between Reg CF and Reg D in terms of the ongoing obligations of the issuer

Reg CF (Regulation Crowdfunding) and Reg D (Regulation D) have different rules and limitations on the ongoing obligations of the issuer after the securities offering is completed.

Under Reg CF, companies are subject to ongoing reporting requirements. They must file annual and semiannual reports with the SEC and provide them to investors. These reports must include information about the company’s financial condition, its use of proceeds, and other information that is material to investors. Additionally, they must also file an annual report with the SEC and provide it to investors. These ongoing reporting requirements are designed to provide transparency and protect investors, but they can be burdensome and costly for companies to comply with.

On the other hand, the ongoing obligations of the issuer under Reg D are less extensive than under Reg CF. Companies that raise capital under Reg D are not subject to the same ongoing reporting requirements as companies that raise capital under Reg CF.

Advantages of Reg CF vs Reg D

Here are some advantages of using Reg CF over Reg D:

  • Ability to raise a larger amount of capital: Under Reg CF, companies can raise up to $5 million in a 12-month period. This can be especially beneficial for companies that are looking to raise a significant amount of money but don’t want to go through the more rigorous process of an initial public offering (IPO) or a Regulation A offering.
  • Ability for non-accredited investors to participate: Reg CF allows both accredited and non-accredited investors to participate in the offering, which can be a great way to build a base of loyal investors who are invested in the success of your company.
  • Greater visibility and marketing opportunities: Reg CF allows companies to advertise and solicit their offerings to the general public, which can help to generate more visibility and interest in the offering. This can be especially beneficial for companies that are looking to raise capital from a wider pool of investors.
  • Greater liquidity for investors: Rega CF offerings can be traded on certain crowdfunding platforms, which can provide investors with greater liquidity compared to private placements under Reg D.

It’s worth noting that while Reg CF may have some advantages over Reg D, it also has some cons such as increased regulatory burdens and costs, which should be considered before making a decision.

Advantages of Reg D vs Reg CF

Here are some advantages of using Reg D over Reg CF:

  • Ability to raise an unlimited amount of money: Reg D allows companies to raise an unlimited amount of money from accredited investors and non-accredited investors (under 506b), without registering the securities with the SEC. This can be beneficial for companies that are looking to raise money from a smaller number of investors, such as family and friends, or for companies that are looking for a less restrictive way to raise capital.
  • Up to 35 non-accredited investors (if 506b): Reg D offers an option of 506b, which allows companies to raise an unlimited amount of funds, including from non-accredited investors, without registering the securities with the SEC. However, there cannot be a general solicitation (aka no advertising).
  • Less restrictive rules on advertising and general solicitation (if 506c): Reg D offers an option of 506c which allows for general solicitation and advertising, this can be beneficial for companies that want to reach a larger audience of potential investors and not be bound to marketing through a Registered Portal.
  • Less ongoing reporting and compliance requirements: Reg D has less stringent ongoing reporting requirements than Reg CF, and companies are not required to file ongoing reports with the SEC.

Choosing between Reg CF and Reg D

When it comes to deciding whether to use Reg CF or Reg D to raise capital, the best option will depend on your specific circumstances. If you’re looking to raise more than $5 million or don’t want to be subject to the same regulatory burdens as companies that are raising capital under Reg CF, then Reg D may be the better option for you.

Make informed decisions about your syndication.

Contact our syndication and private placement memorandum law firm today!