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Blog

Crowdfunding and 506(c) Offerings Important Differences

Mihir Gandhi

Crowdfunding has become a popular way for start-up entrepreneurs to raise – or attempt to raise – money for their new ventures. All you need is a good idea, a good marketing campaign, and a robust and engaged social network. While the JOBS Act and Rule 506(c) were intended to at least partially address the new crowdfunding reality, there are key differences.

Crowdfunding

Crowdfunding allows small companies, startups and other entrepreneurs to raise money from the “crowd”.  With rewards based crowdfunding, people can contribute to your campaign and receive nothing in exchange, other than the perks promised in the campaign. People give money because they care about your company or product and want to help it succeed, not because they will become shareholders. They don’t, and are not entitled to any portion of your successful and growing company.

If a “crowdfunding” campaign offers investors a profit interest in the company such as equity, convertible notes, or debt, it is considered securities and is regulated by the Securities and Exchange Commission (SEC). The SEC has a mandate to protect investors from fraud.

Registering Securities

The rules for registering securities are generally:

  1. You register the securities before starting to sell them. At this time, your company becomes a public company and is then subject to much more stringent and voluminous reporting requirements.
  2. You take advantage of one of the registration exemptions provided under securities laws. Until recently, none of these exemptions adequately addressed the changes that the Internet and social media have introduced to the way people communicate, market, and interact.  That changed with the implementation of the JOBS Act, and the subsequent adoption of Title II of the JOBS Act as Rule 506(c).

Rule 506 (c) Offerings

If you think that an offering under Rule 506(c) looks an awful lot like crowdfunding, you are not alone. There are some key differences, the main ones being the requirements around accredited investors. Crowdfunding is open to non-accredited investors. Not so under Rule 506(c). A company is permitted to advertise, or conduct general solicitation, but they must ensure every investor is accredited before the investment transaction can be finalized. So-called ‘self-certification’ from the investors themselves is not permitted.

Other Forms of Crowdfunding

If you’re set on equity crowdfunding with non-accredited investors, you’ll be looking for Regulation A+ or Regulation CF.  Regulation A+ comes with high upfront costs and a lot of strings while limiting your capital raise to a maximum of $50 million.  Regulation CF won’t become effective until mid-2016 and comes with a maximum capital raise of $1 million.  Learn more about Regulation A+ and Regulation CF by staying tuned to our blog.

When you wish to become an accredited investor, or verify the accredited investor status of potential investors, turn to the experts at VerifyInvestor.com.

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