This is one of the more difficult and lengthy sections to get through, but take heart, each subsequent section is broken into digestible sub-sections, but this subject needs to be presented and understood in a cohesive manner.


The term, “crowd funding,” has been thrown around a bit too loosely. The original term was properly used for Donation-based Crowd Funding, and it still is. Then the term was used to define the exemption from registration under Title II (2) of the JOBS Act of 2012, more specifically Regulation D – Rule 506(c) and then Title IV (4) of the JOBS Act of 2012 more specifically Regulation A+. Regulation D, Rule 506(c), enables one (an issuer) to advertise a securities offering, using the general media, but to accredited investors only—their accreditation verification is mandated. But that’s not a “crowd” as defined under Title III (3) of the JOBS Act of 2012.  Under Title III (3) of the JOBS Act of 2012, crowd funding is officially termed “Regulation Crowdfunding.”  This means the originally intended term, “crowd funding,” in reference to raising capital, is meant to enable one to raise up to $1,000,000 per year from many investors (accredited or not)—aka “the crowd,” but only through a mandate to use a registered Crowdfunding Portal exclusively for the offering. Title IV (4) of the JOBS Act of 2012 more specifically Regulation A+ is meant to enable one to raise up to $20,000,000 (Tier 1) or $50,000,000 (Tier 2) per year from many investors (accredited or not)—aka “the crowd” but it’s still not considered a “crowdfunding effort” because there is a mandate to use a registered Crowdfunding Portal exclusively for the offering.


I.   Donation-Based Crowdfunding


Donation-fueled crowd funding really isn’t considered raising capital—certainly not substantial amounts—because that model is weak and fading. In addition, do you realize crowd-funded proceeds are considered revenue and therefore subject to federal and state income tax?[1] [2] That’s right…if you were even remotely lucky enough to raise $500,000 through a crowd-funding donation-based model for your “C” corporation, under the tax code for 2016 and assuming a flat 7.5% state-tax corporate rate with little or no cost of goods sold (the cost of the little thank-you gifts), you can expect to pay 40%[3] or $200,000 to the federal, state and local governments. You’d be left with only $300,000 in working capital—ouch! Even LLCs are subject to this extreme tax treatment. Due to the pass through of average, individual, tax brackets and factoring in FICA & Medicare withholdings (aka self-employment tax matched by the LLC) make the effective tax-rate percentage essentially the same.[4] It is our understanding that some of the crowdfunding portals do send out 1099-MISC tax-reporting forms to recipients of funds from a donation-fueled crowdfunding campaign. They do so to shift that tax liability off their backs and onto yours.


If you’ve been in a professional or business capacity in the US for any length of time, you know by now that the federal and state taxing authorities rarely miss an opportunity to tax, if they can. It’s pure speculation when internet-based-publication authors claim that conducting a corporately structured crowd-funding campaign may dodge taxation issues. Officially, the IRS has not ruled on this issue. The current position is they examine on a case-by-case basis. Therefore, if the internet-based-publication authors are wrong, you may be in violation of federal and state tax laws. If they’re right, it’s because you’ve booked it as a capital contribution on your accounting records, which means you’re most likely in violation of federal and state securities laws, unless of course, you have produced and distributed the required securities-offering documents in compliance with federal and state securities laws, rules, and regulations. Remember, there is no tax on the capital raised for your company, through a securities or cryptocurrency offering, bank loan or direct venture capital investment.


II.   Capital-Based, Regulation Crowdfunding


Issuers of Securities

Title III of the JOBS Act (“Title III”) added new Securities Act Section 4(a)(6),[5] which provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions known as Regulation Crowdfunding.


The following includes excerpts from the 685 page document known as the SEC Final Rules regarding Regulation Crowdfunding “Crowdfunding” with comments from us to clarify, warn, praise, or most importantly make one aware of the practicality of various strategies behind the process to ensure success.


Not to get too complicated, there are handful of items you and your company, as the issuer of securities, will need to be aware of when it comes to Regulation Crowdfunding.



Regulation Crowdfunding is the new term used to identify the exemption for registering securities under the Title III regulations. Very much like the Regulation D exemptions, certain companies are not eligible to use the Regulation Crowdfunding exemption. Ineligible companies include non-U.S. companies, companies that already are Exchange Act reporting companies (aka SEC Reporting Companies), certain investment companies (Mutual Funds–open and closed- end), companies that are disqualified under Regulation Crowdfunding’s disqualification rules, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.


Limitation on Investment Amounts

To qualify for the exemption under Section 4(a)(6), crowdfunding transactions by an issuer (including all entities controlled by or under common control with the issuer) must meet specified requirements, including the following:

  • An issuer is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
  • Individual investors, over the course of a 12-month period, are permitted to invest in the aggregate across all crowdfunding offerings up to:

(1) The greater of: $2,000 or 5 percent of the lesser of the investor’s annual income or net worth if either annual income or net worth is less than $100,000; or

(2) 10 percent of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more and

  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.


Under this approach, an investor with annual income of $50,000 a year and $105,000 in net worth would be subject to an investment limit of $2,500.

For further clarification see Chart below:




Investor Annual Income




 Investor Net    Worth








   Investment Limit

$30,000 $105,000 Greater of $2,000 or 5% of $30,000 ($1,500)      $2,000
$150,000 $80,000 Greater of $2,000 or 5% of $80,000 ($4,000)      $4,000
$150,000 $100,000 10% of $100,000 ($10,000)      $10,000
$200,000 $900,000 10% of $200,000 ($20,000)      $20,000
$1,200,000 $2,000,000 10% of $1,200,000 ($120,000), subject to $100,000 cap      $100,000


The rules allow an investor’s annual income and net worth to be calculated as those values are calculated for purposes of determining accredited investor status under Regulation D. [6][7]  The rules allow spouses to calculate their net worth or annual income jointly, and when such a joint calculation is used, the aggregate investment of the spouses may not exceed the limit that would apply to an individual investor at that income and net worth level.[8]


The rules allow an issuer to rely on efforts that an intermediary is required to undertake in order to determine that the aggregate amount of securities purchased by an investor does not cause the investor to exceed the investment limits, provided that the issuer does not have knowledge that the investor had exceeded, or would exceed, the investment limits as a result of purchasing securities in the issuer’s offering.[9] This is good news as the portal would need to provide some mechanism for investors to calculate and determine the maximum allowable investment, thereby relieving you, the issuer, from such determination and burden of proof.


Disclosure Requirements

Securities Act Section 4A(b)(1) sets forth specific disclosures that an issuer offering or selling securities in reliance on Section 4(a)(6) must “file with the SEC and provide to investors and the relevant broker or funding portal, and make available to potential investors.” These disclosures include:

  1. the name, legal status, physical address and website address of the issuer;
  2. the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer;
  3. a description of the business of the issuer and the anticipated business plan of the issuer;
  4. a description of the financial condition of the issuer (for offers of more than $100,000, up to 2-years of past financial statements {balance sheets, statements of comprehensive income, statements of cash flows and statement of changes in stockholders’ equity} produced under U.S. GAAP rules);
  5. a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer with respect to the target offering amount;
  6. the target offering amount, the deadline to reach the target offering amount and regular updates about the progress of the issuer in meeting the target offering amount [over-subscription amounts and limitations];
  7. the price to the public of the securities or the method for determining the price; and
  8. A description of the ownership and capital structure of the issuer.


By filing Form C with the SEC and providing it to the relevant intermediary, issuers will satisfy the requirement of Securities Act Section 4A(b) that issuers relying on Section 4(a)(6) must “file with the SEC and provide to investors and the relevant broker of funding portal, and make available to potential investors” certain information. In a clarifying change from the proposal, we have moved the definition of “investor” from proposed Rule 300(c)(4) to Rule 100(d) to clarify that for purposes of all of Regulation Crowdfunding, “investor” includes any investor or any potential investor, as the context requires.


Surprisingly, the SEC did not adopt an exclusive but held to a non-exclusive list of items that must be contained within the business plan.  Although a business plan must be part of the disclosure, the SEC states: We anticipate that issuers engaging in crowdfunding transactions may have businesses at various stages of development in different industries, and therefore, we believe that the rules should provide flexibility for these issuers regarding what information they disclose about their businesses. This flexible approach is consistent with the suggestion of one commenter that the business plan requirements be scaled to match the size of the offering. We [SEC] also are concerned that a non-exclusive list of the types of information an issuer should consider providing would be viewed as a de facto disclosure requirement that all issuers would feel compelled to meet and would, therefore, undermine the intended flexibility of the final rules.


The final rules will amend Regulation S-T to permit an issuer to submit exhibits to Form C in Portable Document Format (“PDF”) as official filings. Form C allows for pdf exhibits to accommodate for charts, graphs, pro forma financial projections, transcripts of video presentations, etc. The beauty in all of this is that you can add attachments to Form C.  This is important for actually getting investors to invest.  Every investor knows what the downside risk is to his or her investment… 100% loss.  However, rarely is an investor supplied with the potential upside return on investment and timing of that return.  That’s where U.S. GAAP compliant pro forma financial projections come in.


We commend the SEC for providing this degree or flexibility, as it’s our experience that to effectively sell securities to investors your disclosures should be embedded within a story that excites and motivates investors to invest, but also includes the necessary disclosures for compliance.  Form C also provides for an “answer and question” format for filling out Form C. As professional investors, we can tell you that the Q&A format is elementary and smacks of naiveté.


The flexibility of business plan submission may seem like a great way for issuers to keep confidential matters…confidential. However, we caution issuers to not take this course too lightly. It is our opinion that lack of certain disclosures, such as; material breach of contracts (by either party), regulatory proceedings, pending litigation, current litigation or any outstanding court order or judgment affecting the issuer or its property, in the business plan could be a basis for claiming securities fraud, a criminal offense. It’s simply wise, on many levels, to tell the truth and disclose to investors everything you would want to know if you were making the investment in a company you didn’t control.


To avoid serious problems that could arise with the lack of disclosure on Form C for Crowdfunding, we suggest creating a securities-offering document constructed under Regulation D – Rule 506, because it has a comprehensive list of disclosure items (Regulation D – Rule 502) and it is an old body of law. The degree of disclosure required under Regulation D – Rule 502 will help the issuer avoid claims of securities fraud. Once completed, you simply “copy and paste” areas within your securities-offering document under Regulation D – Rule 506 to properly fill out Form C with the SEC for Crowdfunding. It’s important that you have the exact same disclosures in your Form C as you do in your Regulation D – Rule 506 document to strengthen your defense against any claims against you for securities fraud.


More importantly, creating a securities-offering document Regulation D – Rule 506 will easily allow you to run two concurrent offerings simultaneously thereby increasing the probability of success exponentially.  When you create securities-offering documents under Regulation D – Rule 506(b) or (c), or 504, disclosures for Rule 502 are covered.


All of the Financial Architect® programs, contained within this Corporate Engineering Conservatory™ produce securities-offering documents under Regulation D – Rule 506 (which covers Rule 504) for legal counsel review.  In addition, the “Use of Proceeds” Statement as required by item 5 above; prices the securities with the method of determination as required by item 7 above. More importantly, Financial Architect® produces a marketable deal-structure based on GAAP-compliant pro forma financial projections with an illustration of Internal Rate of Return (IRR) and a projected timing of that return. When using the Convertible Note deal structure contained in Seed Capital Producer™ or the Convertible Preferred Equity deal structure within Development Capital Producer™ you do not need to worry about properly valuing the company or its common equity, because your securities will be arbitrarily priced at $1,000 per Note or $100 per Preferred Share. By adding these critical elements as attachments to your Form C, you will be able to show prospective investors potential IRRs under various scenarios with a 5-year time period. This accomplishes two critical elements to a successful capital raising effort through a securities offering. This process: 1.) assures that you will not be selling too much of your company too early, for too little; and 2.) sets your securities offering head and shoulders above the crowd (rest of the issuers looking for capital) thereby increasing the probability of getting funded.


Intermediaries – Crowdfunding Portals

It’s not for us to educate you on all the crowdfunding portal regulations in detail, but you and your company as an issuer of securities, should be aware what their responsibilities are so you can be sure you’re engaging a crowdfunding portal that is in compliance.  The burden of securities offering compliance ultimately falls on the issuer of securities, i.e. your company.


Due to these new changes in securities laws, there are many new opportunities in servicing young companies, in the process of raising capital. Many businesses have taken the route of establishing crowdfunding portals and selling those services to entrepreneurs to capitalize on these changes. The business models that are engaged in establishing crowdfunding portals as a means of attracting investors for their various customers (young companies) may not understand the complexity and compliance issues involving the securities industry…nor the impending litigation risk that comes with the turf.    Although there are some fairly simple rules for registered portals to follow, many may act, inadvertently, as un-registered broker dealers, which is a violation of federal and state(s) securities laws.  We doubt many broker-dealers will engage and compete in this arena for some time, due to the lack of being able to accurately ascertain risks of the function of “broker.”  When companies fail, and start-ups fail a lot, brokers are the only entity left to sue. If a broker dealer chooses to engage in this area they most likely will set up a separate corporation, as a wholly-owned subsidiary, to act as a registered portal. Therefore, the following discussion will focus on registered crowdfunding portals only.  


One of the key investor protections of Title III of the JOBS Act is the requirement that Regulation Crowdfunding transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.


Under Regulation Crowdfunding, offerings must be conducted exclusively through a platform operated by a registered broker-dealer or a funding portal, which is a new type of SEC registrant.


The rules require these intermediaries to:

  • Provide investors with educational materials;
  • Take measures to reduce the risk of fraud;
  • Make available information about the issuer and the offering;
  • Provide communication channels to permit discussions about offerings on the platform; and
  • Facilitate the offer and sale of crowdfunded securities.


The rules prohibit funding portals from:

  • Offering investment advice or making recommendations;
  • Soliciting purchases, sales or offers to buy securities offered or displayed on its platform;
  • Compensating promoters and others for solicitations based on the sale of securities; and
  • Holding, possessing, or handling investor funds or securities.



Transaction Conducted Through an Intermediary (Broker Dealer or Registered Crowdfunding Portal)

Section 4(a)(6)(C) requires that a transaction in reliance on Section 4(a)(6) be conducted through a broker or funding portal that complies with the requirements of Securities Act Section 4A(a).


The SEC believes that requiring an issuer to use only one intermediary to conduct an offering or concurrent offerings in reliance on Section 4(a)(6) would help foster the creation of a “crowd” and better accomplish the purpose of the statute.  In order for a crowd to effectively share information, the SEC believes it would be most beneficial to have one meeting place for the crowd to obtain and share information, thus avoiding dilution or disbursement of the “crowd.” The SEC also believes that limiting a crowdfunding transaction to a single intermediary’s online platform helps to minimize the risk that issuers and intermediaries would circumvent the requirements of Regulation Crowdfunding.


In essence, an issuer can only use one Crowdfunding portal to solicit and attract investors. This is probably best for both issuers and investors but limits competition among portals and requires an issuer to choose a portal based on claims by the portal.  We suggest you use other methods to conduct portal due diligence, such as; researching through third parties, to determine if any or all claims a portal makes are valid.  Just because a portal may be owned or operated by a broker-dealer, doesn’t mean the claims are valid.


Securities Act Section 4A(a)(1) requires that a person acting as an intermediary in a crowdfunding transaction register with the Commission as a broker or as a funding portal.[10] Proposed Rule 300(a)(1) of Regulation Crowdfunding would implement this requirement by providing that a person acting as an intermediary in a transaction involving the offer or sale of securities made in reliance on Section 4(a)(6) must be registered with the Commission as a broker under Exchange Act Section 15(b), or as a funding portal pursuant to Section 4A(a)(1) and proposed Rule 400 of Regulation Crowdfunding. Securities Act Section 4A(a)(2) requires an intermediary to register with any applicable self-regulatory organization (“SRO”), as defined in Exchange Act Section 3(a)(26).[11] Act Section 3(h)(1)(B) separately requires, as a condition of the exemption from broker registration, that a funding portal be a member of a national securities association that is registered with the Commission under Exchange Act Section 15A. Proposed Rule 300(a)(2) would implement these provisions by requiring an intermediary in a transaction involving the offer or sale of securities made in reliance on Section 4(a)(6) to be a member of FINRA or any other national securities association registered under Exchange Act Section 15A. Currently, FINRA is the only registered national securities association. Hence, be sure the portal you choose is both registered with the SEC and FINRA.


Being former securities regulatory compliance professionals, we are intimately familiar with SEC / FINRA regulations. For the most part, FINRA establishes and maintains a code of ethical conduct for its members, which isn’t too difficult to understand or follow.  If a portal is duly registered and is a member-in-good-standing with FINRA,[12] it can be assumed, but not guaranteed, that the portal is in compliance thereby relieving you and your firm of some of that burden.


Intermediaries are generally prohibited under the rule as adopted from having such a financial interest, as discussed below, in response to comments, the SEC has amended the rule to permit an intermediary to have a financial interest in an issuer that is offering or selling securities in reliance on Section 4(a)(6) through the intermediary’s platform, provided that: (1) the intermediary receives the financial interest from the issuer as compensation for the services provided to, or for the benefit of, the issuer in connection with the offer or sale of such securities being offered or sold in reliance on Section 4(a)(6) through the intermediary’s platform; and (2) the financial interest consists of securities of the same class and having the same terms, conditions and rights as the securities being offered or sold in reliance on Section 4(a)(6) through the intermediary’s platform. Among other things, Rule 302(d) requires an intermediary to clearly disclose the manner in which it will be compensated in connection with offerings and sales of securities made in reliance on Section 4(a)(6) at account opening and Rule 303(f) requires disclosure of remuneration received by an intermediary (including securities received as remuneration) on confirmations.[13] In addition, the intermediary must comply with all other applicable requirements of Regulation Crowdfunding, including the statutory limitations on a funding portal’s activities.[14]


In other words, the Crowdfunding portal cannot invest directly or indirectly in an issuer using its portal, but can be compensated, for its services as a portal directly related to selling the securities, with the same type and price of securities being offered. We doubt many portals will be able to afford the lack of cash flow in their business model by accepting illiquid securities as compensation for services rendered.  Think about it if your company was a portal, you’d soon be in a severe cash crunch, because every issuer would just as soon pay for your services with “paper” (their securities) as opposed to cash, because small companies are often starved for cash… hence the reason for raising capital in the first place.


The reason you need to know this, is because the burden of securities compliance ultimately falls upon you and your company as the issuer of securities, in the absence of a broker-dealer. Broker-dealers may share in that burden but never totally relieve that burden from the issuer.  Therefore, if and when using the Regulation-Crowdfunding exemption, you will need to engage only one Crowdfunding Portal and it must be SEC registered and a FINRA Member.  Remember, it’s up to you and or your legal counsel to ensure you’re using a portal that is in compliance and more importantly that your disclosures limit the possibility of claims against you for securities fraud—a criminal offense.


Non-Integration with Concurrent Offerings

Offerings made in reliance on Section 4(a)(6) will not be integrated[15] with other exempt offerings made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering. This is excellent news in that one can immediately move to another offering exempt from registration within the 12-month period, such as; Regulation D – Rules 504, 506(b) or 506(c) or Securities Act Section 4(a)(5) – the Accredited Investor Exemption – and continue the capital raise under the same deal structure. Technically, one could conduct concurrent offerings with the same deal structure under various exemptions and stay in compliance.  From a practical standpoint, this would make a lot of sense in that one would not be reliant on only one method of solicitation (Regulation Crowdfunding) with only one portal. An issuer could “double down” by soliciting inside as well as outside the portal under various other exemptions from registration, such as; Regulation D, SCOR or Regulation A.  This would require legal review and over-sight but should prove cost-effective given the increased probability of a successful capital raising effort.


Under Section 4(a)(6), the amount of securities sold in reliance on Section 4(a)(6) by entities controlled by or under common control with the issuer must be aggregated with the amount to be sold by the issuer in the current offering to determine the aggregate amount sold in reliance on Section 4(a)(6) during the preceding 12-month period. Under the proposed rules, for purposes of determining whether an entity is “controlled by or under common control with” the issuer, an issuer would be required to consider whether it has “control” based on the definition in Securities Act Rule 405.19 As proposed, the amount of securities sold in reliance on Section 4(a)(6) also would include securities sold by any predecessor of the issuer in reliance on Section 4(a)(6) during the preceding 12-month period.


We [the SEC] provide guidance that an offering made in reliance on Section 4(a)(6) is not required to be integrated with another exempt offering made by the issuer to the extent that each offering complies with the requirements of the applicable exemption that is being relied upon for that particular offering. As mentioned earlier, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted will need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Section 4(a)(6). Alternatively, an issuer conducting a concurrent exempt offering for which general solicitation is permitted, for example, under Rule 506(c), cannot include in any such general solicitation an advertisement of the terms of an offering made in reliance on Section 4(a)(6), unless that advertisement otherwise complies with Section 4(a)(6) and the final rules.


In our opinion, the non-integration with other exemptions provision is the most important position the SEC has taken on crowdfunding. The reasoning is the SEC takes notice that crowdfunding, due to its limitation on the size any particular investor can make, will dissuade professional and true angel investors from participating in a crowdfunding campaign. The ability to continue (simultaneously) the capital raising effort through another exemption outside Regulation Crowdfunding may prove invaluable to young companies seeking seed or development capital.


Advertising the Offering

The statute and the final rules prohibit an issuer from advertising the terms of the offering, except for notices that direct investors to an intermediary’s platform. The terms of the offering include the amount offered, the nature of the securities, price of the securities and length of the offering period.[16] The final rules allow an issuer to publish a notice about the terms of the offering made in reliance on Section 4(a)(6), subject to certain limitations on the content of the notice.[17] The notices are similar to the “tombstone ads” permitted under Securities Act Rule 134,[18] except that the final rules require the notices to direct investors to the intermediary’s platform, through which the offering made in reliance on Section 4(a)(6) is being conducted.


Under the final rules, an advertising notice that includes the terms of the offering can include no more than: (1) a statement that the issuer is conducting an offering, the name of the intermediary through which the offering is being conducted and a link directing the investor to the intermediary’s platform; (2) the terms of the offering; and (3) factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number and website of the issuer, the e-mail address of a representative of the issuer and a brief description of the business of the issuer. Consistent with the proposal, the final rules define “terms of the offering” to include: (1) the amount of securities offered; (2) the nature of the securities; (3) the price of the securities; and (4) the closing date of the offering period. [19]The permitted notices will be similar to “tombstone ads” under Securities Act Rule 134,[20] except that the notices will be required to direct an investor to the intermediary’s platform through which the offering is being conducted, such as through a link directing the investor to the platform. The final rules do not impose limitations on how the issuer distributes the notices. For example, an issuer could place notices in newspapers or post notices on social media sites or the issuer’s own website. We believe the final rules will allow issuers to leverage social media to attract investors, while at the same time protecting investors by limiting the ability of issuers to advertise the terms of the offering without directing them to the required disclosure.


In our opinion, this provision has sufficient latitude and is an efficient use of costs. As in other exemptions, a tombstone advertisement, done correctly, will motivate a prospective investor to investigate further by going to your company’s offering page on the portal.


Oversubscription and Offering Price

The final rules permit an issuer to accept investments in excess of the target offering amount, subject to the $1 million limitation, but require the issuer to disclose the maximum amount the issuer will accept and how shares in oversubscribed offerings will be allocated. We [the SEC] continue to believe that permitting oversubscriptions will provide flexibility to issuers so that they can raise the amount of capital they deem necessary to finance their businesses. Given the uncertainty on the part of the issuer about potential market demand for the issuer’s securities, we believe it is valuable for issuers to have the option to permit oversubscriptions. For example, permitting oversubscriptions will allow an issuer to raise more funds, while lowering compliance costs as a proportion of the amount raised, if the issuer discovers during the offering process that there is greater investor interest in the offering than initially anticipated or if the cost of capital is lower than initially anticipated.


This is another pleasantly surprising form of leniency on the part of the SEC. We encourage all our customers to go for the maximum $1,000,000 allowable amount under Regulation Crowdfunding, but design a greater amount in your deal structure, then simply provide for disclosure on Form C that you can go for more. It was called a “green-shoe” option back in the day on Wall Street. We have yet to meet an entrepreneur that could use less capital than originally planned for.


Restrictions on Resales

The statute and the final rules include restrictions on the transfer of securities for one year, subject to limited exceptions (e.g., for transfers to the issuer of the securities, in a registered offering, to an accredited investor or to certain family members).[21] Under the statute and the final rules, the securities will be freely tradable after one year. This too is more lenient than most other exemptions from registration, opening the door to an exit strategy for investors.  This may also enable an issuer to liquidate previous investor holdings during subsequent private offerings, with full disclosure, thereby enabling one to “clean-up” the investor base.  Sometimes an issuer can have “problem” investors and this is a good way to get them out of your hair without costly registration of securities.


Relationship with State Law

Section 305 of the JOBS Act amended Securities Act Section 18(b)(4)[22] to preempt the ability of states to regulate certain aspects of crowdfunding conducted pursuant to Section 4(a)(6). The requirement in the final rules that issuers file information on EDGAR also helps to ensure that information about issuers is available to individual state regulators, which retain the authority to bring enforcement actions for fraud.


This is another lenient provision provided by the title of the JOBS Act of 2012 itself.  It was always intended that the Act be national and hence only federal regulators, barring fraud, have jurisdiction on regulation and enforcement.


Exemption from Section 12(g) – Becoming an SEC Reporting Co.

Rule 12g-6 provides that securities issued pursuant to an offering made under Section 4(a)(6) are exempted from the record holder count under Section 12(g) provided the issuer is current in its ongoing annual reports required pursuant to Rule 202 of Regulation Crowdfunding, has total assets as of the end of its last fiscal year not in excess of $25 million, and has engaged the services of a transfer agent registered with the Commission pursuant to Section 17A of the Exchange Act.  An issuer that exceeds the $25 million total asset threshold in addition to exceeding the thresholds in Section 12(g) will be granted a two-year transition period before it is required to register its class of securities pursuant to Section 12(g), provided it timely files all its ongoing reports due pursuant to Rule 202 of Regulation Crowdfunding during such period. Section 12(g) registration will be required only if, on the last day of the fiscal year in which the company exceeded the $25 million total asset threshold, the company has total assets of more than $10 million and the class of equity securities is held by more than 2,000 persons or 500 persons who are not accredited investors.[23] In such circumstances, an issuer that exceeds the thresholds in Section 12(g) and has total assets of $25 million or more is required to begin reporting under the Exchange Act the fiscal year immediately following the end of the two-year transition period. An issuer entering Exchange Act reporting will be considered an “emerging growth company” to the extent the issuer otherwise qualifies for such status.


The conditional 12(g) exemption will defer the more extensive Exchange Act reporting requirements until the issuer either sells securities in a registered transaction or registers a class of securities under the Exchange Act. Consequently, smaller issuers will not be required to become an Exchange Act reporting company as a result of a Section 4(a)(6) offering.


Therefore, before Title III, if your small company had over 2,000 investors you became an SEC Reporting company whether your company’s securities were publicly traded or not.  This is still the case, but the amount investors you obtain during a crowdfunding campaign will not be counted toward that 2,000 number. We applaud this thoughtful and lenient policy of the SEC.


In conclusion, done correctly, Regulation Crowdfunding conducted under Title III of the JOBS Act of 2012, in conjunction and offered concurrently with other exemptions from registration, such as; Regulation D 506(c), with a marketable deal structure will enable serious entrepreneurs to raise substantial amounts of capital like never before.     Unlike the previous eight decades prior to May 16th 2016, it’s now relatively easy to raise capital the right way—in compliance with federal and state securities and tax laws, rules, and regulations.






[5] 15 U.S.C. 77d(a)(6).

[6] See Instruction 1 to paragraph (a)(2) of Rule 100 of Regulation Crowdfunding.

[7] 17 CFR 230.501. Thus, for example, a natural person’s primary residence shall not be included as an asset in the calculation of net worth. 17 CFR 230.501(a)(5)(i)(A).

[8] For example, if each spouse’s annual income is $30,000, the spouses jointly may invest up to an aggregate of 5% of their joint income of $60,000. If one spouse’s annual income is $120,000 and the other’s is $30,000, the spouses jointly may invest up to an aggregate of 10% of their joint income of $150,000, the same investment limit that would apply for an individual investor with income of $150,000. See Instruction 2 to paragraph (a)(2) of Rule 100 of Regulation Crowdfunding.

[9] See Instruction 3 to paragraph (a)(2) of Rule 100 of Regulation Crowdfunding.

[10] As the SEC noted in the Proposing Release, facilitating crowdfunded transactions (which involve the offer or sale of securities by an issuer and not secondary market activity) alone would not require an intermediary to register as an exchange or as an alternative trading system (i.e., registration as a broker-dealer subject to Regulation ATS). See Proposing Release at 78 FR 66459 (discussing secondary market activity and exchange or ATS registration).

[11] 15 U.S.C. 78c(a)(26). Exchange Act Section 3(a)(26) defines an “SRO” to include, among other things, a “registered securities association.” Id.

[12] See FINRA rules for Portals

[13] See Sections II.C.4.d and II.C.5.f. See also Rule 302(c) of Regulation Crowdfunding (requiring intermediaries to inform investors, at the time of account opening, that promoters must clearly disclose in all communications on the platform the receipt of compensation and the fact that he or she is engaging in promotional activities on behalf of the issuer).

[14] See Exchange Act Section 3(a)(80) (defining “funding portal” and establishing certain limitations on their activities consistent with the statute, such as prohibiting a funding portal from offering investment advice or recommendation; soliciting purchases, sales or offers to buy securities offered or displayed on its website or portal; or holding, managing, possessing, or otherwise handling investor funds or securities). In this regard, compliance with disclosures required by Regulation Crowdfunding generally would not cause a funding portal to provide investment advice or recommendations. Nonetheless, a funding portal should seek to ensure that disclosure of its financial interest(s) in an issuer is not inconsistent with the statutory prohibition on providing investment advice or recommendations. For example, a funding portal must not present its financial interest in an issuer as a recommendation or endorsement of that issuer. See Section II.D.3. We also note that if a funding portal holds, owns or proposes to acquire securities issued by an issuer, or multiple issuers, that individually or in aggregate exceed more than 40% of the value of the funding portal’s total assets (excluding government securities and cash items) on an unconsolidated basis, the funding portal may fall within the definition of investment company under Section 3(a)(1)(C) of the Investment Company Act. We generally would expect, however, that such funding portal would seek to rely on the exclusion from the definition of investment company in Section 3(c)(2) of the Investment Company.

[15] The integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that Securities Act exemptions would apply to multiple offerings that would not be available for the combined offering. See, e.g., Final Rule: Nonpublic Offering Exemption, Release No. 33-4552 (Nov. 6, 1962).

[16] See Instruction to Rule 204 of Regulation Crowdfunding.

[17] See Rule 204(b) of Regulation Crowdfunding. See also Section II.B.4.

[18] 17 CFR 230.134.

[19] See Instruction to Rule 204 of Regulation Crowdfunding.

[20] 17 CFR 230.134.

[21] See Section 4A(e). See also Rule 501(a) of Regulation Crowdfunding.

[22] 15 U.S.C. 77r(b)(4).

[23] 15 U.S.C. 78l(g).