Raising Startup Capital in San Diego: Comparing Regulation D vs. Regulation Equity Crowdfunding

Most people have probably heard of “crowdfunding.” As the name suggests, crowdfunding is the obtaining of small amounts of money per person — the “funding” — from a somewhat large group of people — the “crowd” — to raise startup capital for your new San Diego business. Equity crowdfunding is different than older, more traditional crowdfunding, which was often either a straightforward request for a donation or the pre-selling of some goods or services. Because equity crowdfunders solicit investments and because said investments are almost always passive investments, equity crowdfunding subscriptions are “securities.” Thus, both federal and California securities laws are implemented.

A different method of raising startup capital is through a limited private offering made via Regulation D. We have written about Regulation D here and here.

As the new year begins, we thought it might be useful to provide a quick comparison of SEC regulations with regard to private offerings versus crowdfunding.

Raising Startup Capital in San Diego: SEC Regulations for Private Placements

In general, if you offer or sell securities, you must comply with the federal Securities Act and the Federal Securities and Exchange Act. The offering and sale of securities is regulated by the Securities and Exchange Commission (the “SEC”). In general, anyone or any business offering or selling securities must register the securities and provide a large quantity of information. As one might guess, registration is expensive. Indeed, for small new startups, the cost of registering a “security” is simply prohibitive — the amount raised or the amount needed is not high enough to justify the cost of preparing and filing the registrations required by the SEC.

There are certain exempt offerings/sales which are governed by Rules 504 and 506 — the so-called Regulation D exempt offerings. Regulation D allows for the offering and sale of small amounts of securities to raise relatively small amounts of money to small groups of investors. Regulation D still requires disclosure of significant information and various filings, but those are substantially less extensive — and less expensive — than for a typical securities registration.

Raising Startup Capital in San Diego: SEC Regulations for Equity Crowdfunding

Based on the success of traditional crowdfunding in the 1990s and 2000s, in 2012, Congress passed the JOBS Act. The JOBS Act directed the SEC to create a new exemption to allow for equity crowdfunding. Those regulations took effect in 2016. As with Regulation D, any equity crowdfunding campaign must still make certain filings and must make certain disclosures. Again, while the disclosures are extensive, they are much less than what is required for a typical securities registration.

Raising Startup Capital in San Diego: Comparing Reg D and Reg Crowdfunding

Here are some of the main differences between Regulation D and Regulation Crowdfunding;

• Reg D: limited to 35 investors — Reg CF: no limits
• Reg D: investors must be “accredited” — Reg CF: no need to be “accredited” although each investor is limited in the amount that can be invested
• Reg D: up to $5,000,000 can be raised — Reg CF: up to $1,000,000 can be raised
• Reg D: strict limits on general advertising — Reg CF: general advertising allowed but limited to advertising on registered “funding portals”

As can be seen, the two most important differences are the capital-raise amount and the type of investor. Crowdfunding has brought a large new cadre of investors into the investment pool and that has largely been applauded. The capital-raise limit, however, has been widely criticized.

Raising Startup Capital in San Diego: Contact San Diego Corporate Law

For further information on Regulation D, private securities offerings/sales, private placement memoranda and other mechanisms for raising startup capital, contact Michael Leonard, Esq. of San Diego Corporate Law via email or by calling (858) 483-9200.

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