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Guide to Regulation Crowdfunding

Guide to Regulation Crowdfunding
Lauren Ward
Lauren WardUpdated January 4, 2023
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Regulation Crowdfunding gives small businesses a way to raise money without going through a traditional lender or accredited investor. With Regulation Crowdfunding, you use a crowdfunding site to solicit funds from the general public in exchange for equity in your company. This is significant because prior to 2016 selling securities to the public was actually illegal.Could Regulation Crowdfunding be right for your startup or small business? It might. Read on for a closer look at how this type of fundraising works and its pros and cons.

What Is Regulation Crowdfunding?

Regulation Crowdfunding is a type of equity crowdfunding. It provides a way for a small business to offer and sell securities (such as equity or a convertible note) through a crowdfunding platform. It’s called Regulation Crowdfunding (or Reg CF) because it is regulated by the federal government – specifically the U.S. Securities and Exchange Commission (SEC). Regulation Crowdfunding allows you to raise up to $5 million annually by soliciting investments from virtually anyone aged 18 or older. To do this, your business must use an SEC-registered broker-dealer or funding portal. Some SEC-approved equity crowdfunding portals, or sites, include:
  • Wefunder
  • Crowdfunder
  • AngelList
  • EquityNet
Regulation Crowdfunding represents a major paradigm shift because it allows businesses without any connections to venture capitalists or angel investors – including those from rural areas and marginalized communities – to raise capital. These sites have helped level the playing field by providing funding opportunities for all entrepreneurs, including minority- and women-owned businesses.Recommended: Top Small Business Grants for Minorities 

How Does Regulation Crowdfunding Work?

In order to sell securities to the public through crowdfunding, you must work with an SEC-registered funding portal, which typically requires filling out an application with the site. Once approved, you’ll then need to create a compelling crowdfunding campaign. The goal of any Reg RC campaign is to convince the “crowd” to invest in your business. Some information you’ll want to include:
  • How much you need to raise
  • How you will use the funds
  • Who your target customers are
  • Why investors should back your company
  • How you are different from your competitors
Before you can officially launch your campaign, you can often do a “test the waters'' campaign to gauge public interest in your offering. If it looks like interest is there, you would then go through the time, effort, and expense of filing forms with the SEC. Once you’ve filed your forms, you will be able to officially launch your campaign, accept reserved investments you got during the testing phase, and continue to raise capital for your company.

Pros and Cons of Regulation Crowdfunding

Pros Cons 
Provides access to a wide pool of potential investorsRequires making company’s financials public
Don’t need any connections to VC funds or angel investors to raise capitalRunning a successful campaign requires time, effort, and money
Builds company awareness and a community of ambassadors for your brandFunding sites keep a percentage of the capital your raise
Can often do a test run before officially launchingCan’t keep any investments if you fail to reach your minimum funding goal
Like all forms of fundraising, regulation crowdfunding comes with pluses and minuses. Here’s a look at how they stack up.


Raising money through Regulation Crowdfunding gives you access to a wide pool of potential investors. Rather than looking to attract an individual venture capital firm or angel investor, you can tap all of your fans and customers as potential investors. Plus this form of funding doesn’t require having connections with wealthy investors or currying favor with deep-pocketed friends and family.Regulation crowdfunding also allows you to raise capital while simultaneously building awareness of your business. Through a crowdfunding site, you can create buzz and build a loyal community of ambassadors for your brand. Finally, you may be able to do a “test the waters” campaign to gauge the public’s interest before going through the time and expense of filing an offering statement with the SEC. This can help reduce failure rates and wasted resources. 


Regulation crowdfunding also comes with some downsides, however. For one, it requires you to publicly disclose your company’s financial situation, as well as issue ongoing annual reports. This may not be ideal if you’re trying to keep some information under wraps from your competitors. Also, should your campaign fail, that will be public as well.Launching a successful Regulation Crowdfunding campaign also takes time, effort, and money. While costs vary, it can run anywhere from $4,000 to $10,000 for the financial review and legal documentation. If you need a business audit that adds to the costs. What’s more, funding portals generally take 7% of the raise, and may also charge additional fees.Finally, should you fail to meet your minimum funding goal, any money put in by investors is refunded to them.

History of Regulation Crowdfunding

SEC regulation crowdfunding is relatively new. From 1933 to 2012, it was actually illegal for most of the population to invest in private companies. To invest in a private company, individuals had to be considered “accredited investors.” According to the SEC, an individual accredited investor is anyone who either:
  • Has an earned income of more than $200,000 (or $300,000 together with a spouse) in each of the last two years and reasonably expects to earn the same for the current year, or:
  • Has a net worth over $1 million, either individually or together with a spouse (excluding the value of a primary residence).
As a result, a small private business could only go to accredited investors to raise money outside of getting a small business loan. Since only a small segment of the population qualifies, finding an accredited investor can depend more on an entrepreneur’s connections than their qualifications. For years, many highly qualified small businesses missed out on equity funding simply because of who they knew or where they were located. Things began to change with the introduction of the Jumpstart Our Business (JOBS) Act, which President Obama signed in 2012. However, regulation crowdfunding itself, also known as Title III or Reg CF, didn’t get the green light until May 2016. Now, practically anyone can invest in a private company they’re interested in funding.Recommended: Finding Investors for a Business 

What Are the Requirements for Regulation Crowdfunding? 

For Businesses

  • Must be a U.S.-based corporation or LLC
  • Can only sell securities through an SEC-registered intermediary
  • Must provide complete and accurate disclosures to the public for investors to make informed decisions
  • Can raise a maximum is $5 million within a 12-month period
  • Must limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period
  • ‍If you are raising more than $1.07 million, you need to have an independent CPA  audit your financials for the last two fiscal years or since your business’s inception 

For Investors

  • Must be at least 18 years of age
  • Must disclose identifying information, as well as net worth and annual income
  • Generally must abide by a holding period of at least 12 months after the campaign closes
  • Non-accredited investors may only invest the greater of $2,200 or 5% of their annual income or net worth if their annual income or net worth is less than $107,000; if their annual income or net worth is greater than $107,000, they may invest up to 10% of their annual income or net worth (whichever is more)
  • An accredited investor taking part in SEC regulation crowdfunding may invest as much as they wish
Recommended: What Donation Crowdfunding Is and How it Works 

Regulation Crowdfunding vs Equity Crowdfunding

Regulation CrowdfundingEquity Crowdfunding
Allows small business to sell securities to the publicIncludes all types of crowdfunding where a company sells securities
Can raise a maximum of $1.07 millionMaximum raise up to $50 million
Generally used for pre-seed or seed round of startup fundingUsed for pre-seed through later stage funding rounds
Regulation crowdfunding and equity crowdfunding are essentially synonymous. Both terms refer to the process of selling securities through crowdfunding. The only difference is that equity crowdfunding can include Regulation Crowdfunding (Reg CF) and Regulation A+ (Reg A+) offerings.Generally, Reg CF allows a maximum raise up to $1.07 million, while Reg A+ allows a maximum raise up to $50 million. Reg CF is typically the type of equity funding used in the pre-seed or seed round of startup funding, whereas Reg A+ equity crowdfunding is typically involved in later – and much larger – funding rounds, such as Series A or Series B.

The Takeaway

Many startups and small businesses never get the opportunity to pitch to venture capitalists and angel investors. Regulation Crowdfunding has changed the status quo by giving all entrepreneurs the opportunity to find both accredited investors and everyday people willing to back their business. While selling securities through a crowdfunding site is different from offering shares of a company on an official stock exchange, you will still need to register with the SEC to participate in this type of equity-based fundraising. However, you will be able to set your own valuation and terms for the raise and have full control of the offering.Attracting investors through crowdfunding takes a fair amount of time, effort, as well as money. And, as with any type of equity funding, it involves giving up some ownership of your business.

3 Small Business Loan Tips

  1. Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders.
  2. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
  3. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

Frequently Asked Questions

Who can invest through regulation crowdfunding?
What are the three most common kinds of crowdfunding?
What is a regulation crowdfunding offering exactly?
iStock/David Gyung

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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