Crowdfunding Rules: Summary of SEC’s Proposed Rules

On October 23, 2013 the Securities and Exchange Commission (“SEC”) issued proposed regulations (“proposed rules”) to permit companies to offer and sell securities through crowdfunding as contemplated by Title III of the JOBS Act (“JOBS Act”). In sum, the purpose of the JOBS Act is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors. The SEC sought public comment on the proposed rules for 90 days.

Investment Restrictions

• An eligible company may raise a maximum aggregate amount of $1 million through crowdfunded offerings in a 1-year period.
• Investors are allowed to invest, over a 1-year period, up to: $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000; or 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 1-year period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
• As mandated by Title III of the JOBS Act, securities purchased in a crowdfunding transaction cannot be resold for a period of 1 year.
• Certain companies would not be eligible to use the crowdfunding exemption, including non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, and companies that have indicated their business plan is to engage in a merger or acquisition with an unidentified company.

Disclosures Required

Companies engaged in a crowdfunding offering are required to file certain information with the SEC, provide it to investors and the intermediary, and make it available to potential investors:

• Information about officers, directors, and owners of 20 percent or more of the company;
• A description of the company’s business and the use of proceeds from the offering;
• The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
• Certain related-party transactions;
• A description of the company’s financial condition; and
• Financial statements that, depending on the amount offered and sold during a 12-month period, must be accompanied by tax returns or reviewed or audited by an independent public accountant.

Online Crowdfunding Platforms

All crowdfunding transactions must take place exclusively online through a platform operated by a registered broker or a funding portal — a new type of SEC registrant. These intermediaries must: provide investors with educational materials; undertake measures to reduce the risk of fraud; make available information about the issuer and the offering; provide communication channels to allow discussions about offerings; and facilitate the offer and sale of crowdfunded securities.

A funding portal is prohibited from: offering investment advice or making recommendations; soliciting offers to buy or sell securities displayed on its website; imposing certain restrictions on compensating people for solicitations; or holding or handling funds or securities belonging to investors.

Regulation Crowdfunding: The Final Rules (2016 and Beyond)

The SEC finalized its crowdfunding rules — known as Regulation Crowdfunding or Reg CF — in October 2015, with the rules taking effect in May 2016. The final rules were substantially consistent with the proposed rules summarized above, though with some adjustments. In 2021, the SEC increased the offering limit under Reg CF from $1.07 million to $5 million per 12-month period, significantly expanding the utility of crowdfunding for early-stage companies seeking meaningful capital raises.

The 2021 amendments also temporarily relaxed certain financial statement requirements and extended testing-the-waters communications rules that allow issuers to gauge investor interest before incurring the costs of a full offering. These changes reflected a broader policy judgment that the original Reg CF offering limit was too low to make crowdfunding economically viable for most startups after accounting for compliance costs.

Practical Considerations for Startups Considering Crowdfunding

Equity crowdfunding under Reg CF is not a replacement for traditional venture capital or angel investment — it is a complementary tool, particularly for consumer-facing businesses with engaged communities that can serve as both investors and brand advocates. Before launching a Reg CF offering, a startup should consider:

• Compliance costs — preparation of required disclosures, financial statement review or audit, and platform fees can consume a significant portion of smaller raises;
• Cap table management — a successful crowdfunding round can add dozens or hundreds of investors to your cap table, creating administrative complexity and potential complications for future institutional financing;
• Securities law compliance — the JOBS Act exemption is narrow, and inadvertent violations can create significant liability. Working with an experienced securities attorney before launch is essential;
• Intellectual property protection — before disclosing your business concept, technology, and business model in publicly available offering materials, ensure that your core intellectual property is adequately protected through patents, copyrights, trademarks, and confidentiality agreements;
• Platform selection — registered funding portals vary in their fee structures, investor communities, and track records of successful raises. Careful platform selection is an important strategic decision.

How Revision Legal Can Help

Revision Legal advises startups, emerging growth companies, and entrepreneurs on the full spectrum of issues that arise in connection with early-stage capital formation — including Regulation Crowdfunding compliance, intellectual property protection before and during a fundraising process, technology licensing, and e-commerce law. Whether you are preparing for a Reg CF offering or evaluating alternative fundraising structures, our attorneys can help you navigate the legal landscape efficiently.

If you seek a crowdfunding lawyer, contact Revision Legal today at 855-473-8474 or through our online contact form.

Legal Counsel for Crowdfunding Issuers and Investors

Both issuers and investors in crowdfunding offerings benefit from legal counsel. For issuers, the offering documents — including the Form C filed with the SEC — must accurately describe the business, its financials, and the risks of investment. Material omissions or misstatements in offering documents can give rise to securities fraud liability under Section 10(b) of the Securities Exchange Act and Rule 10b-5, even for small offerings. Given the relatively modest amounts raised in a typical Reg CF offering, the cost of securities liability is disproportionately damaging.

For investors evaluating crowdfunding opportunities, legal counsel can help interpret the offering documents and assess the legal risks of a proposed investment. Crowdfunding investors are not the sophisticated institutional investors who participate in traditional venture capital rounds — they are often retail investors who may not have the financial or legal background to evaluate the risks of early-stage investment independently. The investor protection framework built into Reg CF — including investment limits, required disclosures, and the one-year resale restriction — provides some structural protection, but careful due diligence remains essential.

Revision Legal advises startups and growth-stage companies on the legal aspects of capital formation, including Regulation Crowdfunding compliance. If you seek a crowdfunding lawyer or need advice on any aspect of securities law for your business, contact Revision Legal today at 855-473-8474 or through our online contact form.

Why Work with Revision Legal?

Revision Legal is a national intellectual property and internet law firm that represents clients across the United States in trademark, copyright, trade secret, and internet law matters. We are a firm of specialists — not general practitioners who handle IP work as one component of a broad practice, but attorneys whose entire professional focus is on the intersection of technology, creativity, and commerce.

Our attorneys have handled cases at every level of the federal court system, including the United States Court of Appeals for the Federal Circuit, the Sixth Circuit, the Ninth Circuit, and before the Trademark Trial and Appeal Board. We manage trademark portfolios for hundreds of clients, ranging from individual entrepreneurs registering their first mark to publicly traded companies maintaining global trademark portfolios across dozens of countries.

We believe that access to expert legal counsel should not depend on the size of your organization. Revision Legal’s flat-fee service model for routine IP matters — trademark registration, copyright registration, DMCA notices, and standard licensing agreements — allows small businesses, startups, and individual creators to access the same quality of legal representation that larger companies receive, at a price that is predictable and fair. For complex litigation and contested proceedings, we work efficiently to achieve the best possible outcome for our clients while managing costs responsibly.

Whatever your intellectual property or internet law need — whether you are protecting a new brand, enforcing your rights against an infringer, defending against a legal demand, or navigating a complex licensing transaction — Revision Legal has the expertise to help. Contact us today at 855-473-8474 or through our online contact form to discuss your matter.