New Reg CF Rules: 2021 Amendments and What They Mean for Issuers and Investors
Introduction
The SEC's March 2021 amendments to Regulation Crowdfunding represented the most significant update to the rules since their initial implementation in 2016. The amendments increased offering limits from $1.07 million to $5 million, expanded investment limits for certain investors, permitted the use of special purpose vehicles (SPVs), and made several other changes designed to improve the efficiency and accessibility of Reg CF. Understanding these new rules is essential for issuers considering Reg CF and investors evaluating opportunities on crowdfunding platforms.
This guide explains the key changes in the 2021 amendments, their practical implications for issuers and investors, and how the amendments have impacted Reg CF market activity and success rates.
Increased Offering Limit: $1.07M to $5M
The most significant change was the increase in the Reg CF offering limit from $1.07 million to $5 million in any 12-month period. This nearly 5x increase dramatically expanded the pool of companies for which Reg CF is a viable capital raising option. Companies that previously would have needed to use Regulation D or Regulation A+ can now raise sufficient capital through Reg CF while benefiting from its lower costs and faster timelines.
The $5 million limit applies to the aggregate amount sold in reliance on Reg CF during any 12-month period. Issuers can conduct multiple Reg CF offerings as long as the total amount raised in any rolling 12-month period does not exceed $5 million.
Impact: The increased limit has led to larger average offering sizes, with many successful campaigns now raising $2-4 million compared to the $500K-$1M typical under the old rules. This has made Reg CF competitive with Regulation D for many early-stage companies.
Expanded Investment Limits
The amendments increased investment limits for certain investors, making it easier for investors to build diversified Reg CF portfolios. The key changes include:
Increased Minimum Investment Amount: The minimum investment amount for investors with income or net worth below $124,000 increased from the greater of $2,200 or 5% to the greater of $2,500 or 5%. This modest increase reflects inflation adjustments.
Increased Maximum Investment Amount: The maximum investment amount for investors with income and net worth above $124,000 increased from $107,000 to $124,000. This increase enables wealthier non-accredited investors to make larger investments in Reg CF offerings.
Impact: The expanded limits have increased average investment sizes and enabled investors to participate in more offerings without hitting their annual limits.
Special Purpose Vehicles (SPVs)
The amendments permit issuers to use special purpose vehicles (SPVs) to pool investors in Reg CF offerings. An SPV is a legal entity created solely to invest in a single company. The use of SPVs can dramatically simplify cap table management by consolidating hundreds or thousands of individual investors into a single entity on the issuer's cap table.
Prior to the amendments, issuers conducting large Reg CF campaigns often ended up with hundreds of direct shareholders, creating administrative burdens for cap table management, shareholder communications, and future fundraising. SPVs solve this problem by allowing the issuer to have a single SPV shareholder while the SPV itself has hundreds of underlying investors.
Requirements for SPVs: The SPV must be formed by the funding portal or broker-dealer facilitating the offering, the SPV must invest exclusively in securities of a single issuer, and investors in the SPV are subject to the same investment limits as if they invested directly in the issuer.
Impact: SPVs have been widely adopted by funding portals and issuers, with many platforms now offering SPV structures as standard for larger campaigns. This has made Reg CF more attractive for issuers concerned about cap table management.
Simplified Financial Statement Requirements
The amendments simplified financial statement requirements for first-time Reg CF issuers raising between $124,000 and $618,000. Previously, all offerings in this range required reviewed financial statements. The amendments permit first-time issuers to provide financial statements certified by the principal executive officer instead of reviewed financials.
This change reduces costs for first-time issuers by $5,000 to $15,000 (the typical cost of reviewed financials), making Reg CF more accessible for very early-stage companies with limited resources.
Impact: The simplified requirements have enabled more early-stage companies to access Reg CF, particularly companies raising $250K-$500K that previously found the reviewed financial statement requirement cost-prohibitive.
Increased Compensation Limits for Funding Portals
The amendments increased the compensation limits for funding portals, allowing them to receive greater compensation for successful offerings. This change was designed to encourage more funding portals to enter the market and invest in platform development and marketing.
Impact: The increased compensation limits have led to more competitive funding portal services, with portals offering enhanced marketing support, investor relations tools, and secondary market capabilities.
Harmonization with Other Exemptions
The amendments harmonized certain Reg CF provisions with Regulation D and Regulation A+ to reduce complexity and enable issuers to more easily navigate between exemptions. Key harmonization changes include:
Consistent Bad Actor Disqualification: Aligned Reg CF bad actor disqualification provisions with Regulation D and Regulation A+, ensuring consistent treatment across exemptions.
Consistent Testing the Waters: Clarified that issuers can test the waters before filing Form C, similar to Regulation A+ testing the waters provisions.
Impact: The harmonization changes have made it easier for issuers to evaluate multiple exemptions and switch between exemptions as their capital needs evolve.
Market Impact of the 2021 Amendments
The 2021 amendments have had significant positive impacts on the Reg CF market:
Increased Offering Volume: Total capital raised through Reg CF increased from approximately $250 million in 2020 to over $500 million in 2024, driven primarily by the increased offering limit.
Larger Average Offering Sizes: Average successful offering sizes increased from approximately $500,000 to $1.5 million, with many offerings now raising $2-4 million.
More Diverse Issuer Types: The increased limits have attracted more growth-stage companies and real estate projects that previously would have used Regulation D or Regulation A+.
Improved Success Rates: Success rates for campaigns that reach 30% of their goal have improved from approximately 60% to 70%, likely due to enhanced portal services enabled by increased compensation limits.
Frequently Asked Questions
When did the new Reg CF rules take effect?
The amendments took effect on March 15, 2021.
Can I raise $5 million multiple times per year?
No. The $5 million limit applies to the aggregate amount raised in any 12-month period. If you raised $3 million six months ago, you can raise up to $2 million now.
Do SPVs count toward the 2,000 shareholder threshold?
Yes, but the SPV counts as a single shareholder on the issuer's cap table, not the hundreds of underlying investors in the SPV.
Can I use an SPV for a Reg D offering?
Yes, SPVs can be used for Regulation D offerings as well, though the specific rules differ.
Do the new investment limits apply to offerings that started before March 2021?
Yes, the new limits apply to all investments made after March 15, 2021, regardless of when the offering started.
Related Resources:
- Title III Crowdfunding Limits & Final Rules [blocked]
- Equity Crowdfunding: Reg A+ vs Reg CF vs Reg D [blocked]
