Crowdfunding, Reg D and Reg A

Under the JOBS Act, small companies can raise money through the traditional Regulation D route (Rule 506(b)), or the new Reg D route (Rule 506(c)), under both of which only accredited investors can invest, but under Rule 506(c) issuers can, for the first time, engage in general solicitation and advertising. Other new routes provided include the JOBS Act revisions to Regulation A, which divide Reg A between Tier 1 and Tier 2 offerings and which are not limited to accredited investors. These securities can be publicly offered provided the offering is limited annually to $20 million and $50 million, respectively. The last new route provided under the JOBS Act is under Regulation Crowdfunding (Reg CF); that is, using a new short-form SEC filing to offer equity investments on line using a registered broker-dealer or FINRA-registered funding portal as a required intermediary. Under Reg CF the offering size is limited to $1 million — although contemporaneous Reg D offerings are allowed to increase that number — and investment amounts are constrained by net worth or income with a cap that applies across all Reg CF investments over a trailing 12 month period. The investor must also self-certify his or her understanding of these limitations.

Although the business community lauded the arrival of these new laws, the enforcement community has had a different take on them. As stated in 2017 by then Deputy Attorney General Rod Rosenstein: "Crowdfunding provides an alternative to the traditional banking system by creating a forum for individuals, non-profits, and small businesses to raise funds across a social network or a private website relatively quickly and easily. But the potential downside of crowdfunding is that it occurs outside the watchful eye of a regulated banking and financial industry. Unregulated websites therefore provide a platform for criminals to defraud potential investors."