How equity crowdfunding works under Regulation CF

Updated August 2019

What is Regulation CF?

For the last 80 years, private companies could only raise capital from accredited investors, the wealthiest 2% of Americans. On April 5, 2012, President Obama signed a landmark piece of legislation called The JOBS Act, allowing entrepreneurs to go to the crowd and publicly advertise their capital raises. On May 16, 2016, four years after the JOBS Act was signed, Title III (aka Regulation CF) of the JOBS Act went into effect, allowing private early-stage companies to raise money from all Americans. Startups can now use equity crowdfunding to turn their customers into investors.

Title III of the JOBS Act outlines Reg CF, a type of offering allowing private companies to raise up to $1 million from all Americans. Prior capital raising options, limited private companies to raising money only from accredited investors, historically the wealthiest ~2% of Americans. Like a Kickstarter campaign, Reg CF allows companies to raise funds online from their early adopters and the crowd. However, instead of providing investors a reward such as a t-shirt or a card, investors receive securities, typically equity, in the startups they back.

Step 1: Preparing the Reg CF Offering

All Regulation CF raises must occur entirely through a single SEC/FINRA registered broker-dealer or funding-portal. In addition, a company must draft and file a Form C with the SEC before proceeding with their raise. Prime Crowdfunding works with companies throughout this process to make it as painless and efficient as possible.

How it works for the company

To be considered for listing on Prime Crowdfunding a company must first apply.. Once approved, Prime Crowdfunding works with the company's legal representation to complete Form C with the SEC. The Form C is a document the company must file with the Securities and Exchange Commission (“SEC”) which includes basic information about the company and its offering and is a condition to making a Reg CF offering available to investors. It is important to note that the SEC does not review the Form C, and therefore is not recommending and/or approving any of the securities being offered.

Step 2: Launch the Campaign

After filing the Form C, a company may launch their equity crowdfunding campaign on the Silicon Prairie Portal and Exchange platform. Prime Crowdfunding's online platform has been engineered to seamlessly accept investments online, including, facilitating investment document execution, funds transfer and regulatory compliance.

How it works for the company

Every fundraise and customer base is different. Here are three common groups of customers and potential investors companies can typically reach to promote the round to and accept investments from:

The company's customers and the Prime Crowdfunding investor network to build initial momentum and excitement.
The early-adopters, the company's extended network and affinity groups.
The public through robust press, advertising, and digital campaigns.

How it works for the investor

The company's Prime Crowdfunding profile presents comprehensive information about the company to let potential investors make an informative investment decision. Potential investors should read this information carefully. The Silicon Prairie Exchange platform allows investors to confirm their identity, sign legal documents, and transfer funds online in a safe and compliant manner. Investors should be careful and only invest in crowdfunding opportunities with reputable and registered funding-portals.

Step 3: Accepting Investments

To allow for adequate time for investors to make investment decisions, the company is prohibited from closing on any investments until 21 days after listing their Regulation CF offering with a funding-portal.

How it works for the company

While no investments can be closed during this 21 day period, this is the crucial start of your fundraise. The most successful fundraises start strong and end strong. They are able to show fundraising traction early by engaging their customer base and personal networks.

How it works for the investor

Investors can still make an investment in the company during the 21 days, but it will not be closed upon even if the minimum offering amount has been reached. Any funds drawn will be held in escrow and all investors will be able to cancel their investment and have funds returned to them if they wish.

Step 4: Material Changes to the Offering

If there is a material change in the offering, each investor will be notified and investors must re-confirm their investment within 5 business days. If an investor does not re-confirm their investment within 5 business days of a material change in the offering, their investment will be automatically canceled and unwound.

How it works for the company

Per regulations set forth by the SEC, each company must disclose any material changes during the time of their fundraise. Prime Crowdfunding will help the company coordinate notices sent to investors and their re-confirmations.

How it works for the investor

If there is a material change in the company or the offering, you will be notified via email and your investment will be canceled unless you re-confirm your investment within 5 business days.

Step 5: Closing the Round

Prime Crowdfunding and Silicon Prairie will manage the entire closing process and ensure that all legal and regulatory obligations are met. The funds from escrow will be transferred to the company upon completion of the offering.

How it works for the company

Prime Crowdfunding is here to make the closing as easy as possible. We will work with the escrow agent and other third parties to make sure that shareholder records are appropriately placed and managed and that everything is done in a compliant manner.

How it works for the investor

Investments are memorialized and made official upon closing. You will have access to your summary statements and a portfolio of your investments once they have been closed. Note that investors have the right to cancel their investment for any and all reasons up to 48 hours before a closing occurs.

Step 6: After the Fundraise

The platform provides messaging and managing tools for the company and investors to collaborate online after closing the round.

How it works for the company

Prime Crowdfunding is currently building reporting tools to allow companies to manage communications with their shareholders on the Silicon Prairie portal. Under Regulation CF, companies are required to report to its shareholders on an annual basis.

How it works for the investor

Investors can return to Silicon Prairie at any time to view their portfolio and their investment. In addition to monthly account statements, investors will receive periodic updates from the company about their business. In certain circumstances a company may terminate its ongoing reporting requirement if:

The company becomes a fully-reporting registrant with the SEC
The company has filed at least one annual report, but has no more than 300 shareholders of record
The company has filed at least three annual reports, and has no more than $10 million in assets
The company or another party purchases or repurchases all the securities sold in reliance on Section 4(a)(6)
The company ceases to do business