The methods used by startups to obtain funding have come a very long way due to technological advances, so much so that federal securities laws have evolved to ensure these investments are protected. A relatively new rule, Regulation CF (also known as Title III of the JOBS Act), enables startups to raise equity through crowdsourcing, meaning the general public and not just the richest 2 percent of Americans. Regulation CF went into effect in 2016 and was most recently modified in 2020. Crowdfunding is frequently utilized by startups to convert their clients into investors, which greatly benefits founders. Every startup founder should be well informed about how crowdfunding operates, what its legal restrictions are, and how to assess whether Regulation CF is the best instrument for your new company’s capital funding.
Increased Investment Limits
Companies can now use crowdsourcing to raise up to $5 million in total over the course of a year, according to the SEC. Compared to the original $1.07 million cap, this is a huge leap. The new cap significantly increases a startup’s capacity to raise money via crowdfunding. The disparities faced by small businesses looking for possibilities for startup capital are mitigated by these advancements. Large businesses have historically had a competitive advantage when it comes to access to funding, but crowdfunding has somewhat leveled the situation.
Accredited and Non-Accredited Investors
Investors can be accredited by passing either an asset or an income requirement set by the SEC. Investors with certifications and specializations in securities investment are also eligible for several new categories. An individual’s ability to invest through regulation crowdfunding is no longer restricted as long as they are accredited. While non-accredited investors are still restricted, the restriction, which used to be the lesser of the set annual limits, has changed to the greater of annual limits set by income or net worth.
Startups now have better access to capital than ever thanks to the new legislation. Startup founders should seek the advice of a securities attorney in order to access this funding responsibly
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