Reg A, Reg CF, Reg D: Crowdfunding Differences

Equity Crowdfunding: The Differences Between Reg A, Reg CF, and Reg D Raise Types

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Reg A, Reg CF, and Reg D are the three main SEC exemptions that let private companies raise capital without a full public offering. They differ mainly in how much you can raise, who can invest, and how much disclosure is required. Each is a rule that exempts capital raises meeting specific qualifications from full SEC registration (a 'Regulation'). The SEC has taken several steps to simplify and harmonize these Regulations, including rules such as Regulation A/A+ (collectively 'Reg A'), Regulation D ('Reg D'), and Regulation Crowdfunding ('Reg CF').

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Ultimately, the key differences between these three regulations fall into one of three categories:

1. Type of investor the issuer can accept
2. Maximum amount of funds raised
3. Eligibility and reporting requirements.

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Which Offering is Right for Your Business?

A licensed broker-dealer or securities attorney is best positioned to answer that question for your specific situation. That's a recommendation for guidance, not a legal requirement, Reg A and Reg D don't require you to use a broker-dealer as an intermediary, though Reg CF does. Rather than copy what another business did or assume that internet research will provide you with sufficient knowledge, consider consulting a securities attorney and broker-dealer.

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Choosing the right vehicle for your offering depends on several factors, including the amount of money you want to raise, the type of business you run, the jurisdictions you are targeting, and your ability to provide required audited financials. Broker-dealers and attorneys can walk you through these requirements so you make the right choice for your business. 

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Considerations for a Reg A Raise

Reg A allows companies to solicit investments from the general public. Based on a two-tiered system, businesses can choose between two offering limits: 

• Tier 1 - raise up to $20 million over the course of a 12-month period 
• Tier 2 - raise up to $75 million over the course of a 12-month period

While Tier 2 offerings allow issuers to raise more capital overall, they require more ongoing disclosure and documentation than Tier 1. Learn more about the differences here.

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What are the requirements of Reg A?

Unlike traditional initial public offerings or IPOs, Reg A offerings are designed for retail investors rather than institutional investors. These offerings allow growth companies to engage with their existing customer base by offering them equity and an opportunity to 'get in early’. This equity crowdfunding approach makes a Reg A capital raise an attractive option for companies to raise funds while increasing brand customer engagement. Through this exemption, companies can market to sell their shares, the same way they might advertise their products and services online.

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A Reg A offering is available to any US or Canadian company that is not:

• A blank check company (e.g., a SPAC)
• An investment company

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The company can advertise its offering to the public. Tier 2 issuers must provide audited financial statements to the SEC; Tier 1 issuers are not required to.

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When preparing a Reg A offering, one of the key steps required is completion of a Form 1-A. Among other things, this document consists of material details that are necessary to ensure that the statements made in your offering are not misleading. Some of the key items on this form include information about investors, the methods you will use to raise capital, the risks associated with the investment, the sector and the company and the selling restrictions associated with your company's securities.

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Considerations for a Reg CF Raise

Regulation Crowdfunding (Reg CF) allows businesses to raise up to $5 million annually from investors. There is no requirement that investors be accredited. An issuer can raise capital from the general public through an SEC-registered intermediary, either a broker-dealer or a funding portal - meaning that like Reg A, this exemption allows for shares to be marketed. Read more in our case study on The Flyover, which raised the full $5 million Reg CF limit through the platform. 

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What are the requirements of Reg CF? 

Reg CF requires detailed investor disclosures, including financial and investor personal information that must be provided before someone can invest. Additionally, Reg CF issuers must also accept caps on the amount that non-accredited investors can contribute, along with ongoing SEC reporting requirements. Specifically, if a non-accredited investor's annual income or net worth is under $124,000, their limit is the greater of $2,500 or 5% of the greater of their income or net worth. If both are at or above $124,000, the limit rises to 10% of the greater of the two. Regardless of income or net worth, no non-accredited investor can invest more than $124,000 in total across all Reg CF offerings in any 12-month period.

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To be eligible for Reg CF issuance, your company must be US-based and in full compliance with all relevant SEC regulations. Companies that have no specific business plan, or that have indicated their primary business plan is to engage in a merger or acquisition, cannot raise via Reg CF.

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In order to leverage this exemption, you must complete and file a Form C. Materials disclosed in the form help investors make an educated decision before putting their money into the company. The form contains important issuer information such as the physical address of the company and the intermediary selected for the campaign, as well as specific details about the offering such as the price per security and target amount to be raised. In addition, issuers must also provide basic financial information about the company, including its revenue, profitability, and projected growth rate. 

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Considerations for a Reg D

Reg D is a set of rules that govern private placement offerings, which typically target a known audience of existing investors. Reg D has two main exemptions in use today: Rule 504 and Rule 506 (Rule 505 was repealed by the SEC in 2017).

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Rule 504 allows companies to raise up to $10 million in a 12-month period and can include non-accredited investors, but it doesn't permit the same broad general solicitation that Rule 506(c) allows.

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Rule 506 is the most commonly used exemption under Reg D. Rule 506(c) allows an issuer to market their raise publicly and sell an unlimited amount of unregistered securities, but only to accredited investors. Using Rule 506(b), an issuer can include 35 non-accredited 'sophisticated' investors but cannot market their raise publicly.

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What are the requirements of Reg D506(c)?

In order to take advantage of the exemption from registration offered by Reg D, companies must meet specific requirements. First, they must file a Form D with the SEC within 15 days after the first sale of the security. This form provides information about the offering, including the names and addresses of the company's officers and directors, the type and amount of securities being offered, and the compensation arrangements for those selling the securities.

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Outside of the US? Consider Regulation S

Regulation S provides an SEC-compliant way for non-US and U.S. companies to raise capital outside the U.S. It is not necessary to have a U.S. company to use Regulation S.

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A Regulation S offering can involve issuing equity or debt securities, and a company that makes its offering under Reg S can also use another method to raise capital from U.S. investors - usually Reg D,  506 C or Rule 144A. The SEC does not require Reg S investors to be accredited investors.

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Conclusion

All offerings have their own unique set of benefits and limitations. So, which one is right for your business? It depends on your specific capital raise needs and goals - and speaking with a licensed broker-dealer or knowledgeable securities attorney is crucial to making the right decision for your business. 

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Equity crowdfunding is an incredible innovation in the capital markets and is allowing startups to raise capital from their largest and most engaged community: their customers. By building a community of shareholders via equity crowdfunding, you essentially create a group of brand advocates and beta-testers for your company. It's a great way to get both clout and runway for your startup. 

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Frequently Asked Questions

What happened to Rule 505?
Rule 505 was repealed by the SEC, effective May 22, 2017. Its function was absorbed into an expanded Rule 504, which the SEC raised from a $5 million cap to its current $10 million cap around the same time. If you see Rule 505 referenced in older articles or guides, it no longer applies. Regulation D today consists of Rule 504 and Rule 506, which includes both 506(b) and 506(c).

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Can I use more than one exemption at the same time?
You can use different exemptions for different capital raises over time, many companies start with a Reg D or Reg CF round and later move to Reg A as they scale. But you generally can't combine two exemptions within the same offering. The SEC's integration rules determine whether multiple offerings happening close together in time get treated as one combined offering subject to the stricter of the two exemptions' requirements, so timing and structure matter. Talk to a securities attorney before running overlapping raises.

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Which exemption is easiest for a first-time raise?
It depends on your raise size and investor base, but Reg CF is often the most accessible starting point for first-time issuers. Its disclosure requirements scale with offering size, so a smaller raise means lighter financial statement requirements, and the SEC-registered funding portal you work with handles much of the compliance process. Reg D 506(b) is also common for early raises limited to accredited investors and up to 35 sophisticated non-accredited investors. Reg A is generally better suited to later-stage companies, since Tier 2's audited financials and ongoing reporting requirements are a heavier lift for a first raise.

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Do I need a broker-dealer for a Reg D offering?
No. Regulation D itself doesn't require a broker-dealer, unlike Reg CF, which does. Companies can sell securities directly to investors under Reg D. That said, if you compensate anyone to help solicit investors, that person generally needs to be a registered broker-dealer under separate securities laws, so many issuers bring one in anyway for larger or more complex 506(c) raises.

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