Benzinga Explains: What is a Reg CF Raise?

CF Raises Explained

A Regulation CF (Reg CF) offering is an investment security that startups and early-stage companies can issue as part of their push to raise capital. The “regulation” in Reg CF offerings references the fact that the offering is issued pursuant to regulations enforced by the Securities and Exchange Commission (SEC). 

The “CF” stands for crowdfunding. Startups can raise up to $5 million annually through Reg CF offerings, which offer everyday investors a chance to buy early equity in emerging companies. Startups often prefer raising capital via Reg CF offerings over borrowing because it allows them to raise funds without having to borrow the money they need to operate.  

How Did Reg CF Offerings Come Into Being?

The Jumpstart Our Business Startups (JOBS) Act, which became law in 2012, broke down several barriers that had previously prohibited nonaccredited investors from participating in startup opportunities. By the time the act passed, crowdfunding had become a popular way for some startups to raise the capital they needed to get off the ground. 

But crowdfunding was not regulated, meaning there were no limits on how much a company could raise or how much an investor could contribute. Nor were there any protections in place for investors. The permissive environment posed a potential danger to investors, and the government took steps to pave the way for crowdfunding offerings to be regulated by the SEC. 

Regulation CF was put into the JOBS Act. Aside from providing a regulatory structure for crowdfunded offerings, another goal of Reg CF was to make it easier for startups to raise money on the internet via equity crowdfunding platforms. Originally, Reg CF allowed startups to raise up to $1 million per year in Reg CF offerings. In 2021, the maximum investment threshold was raised to $5 million. 

Reg CF Restrictions

Reg CF of the JOBS Act requires companies that want to raise money through the provision to register and file with the SEC. These filings become public records, and submitting false filings exposes company officers to prosecution. The public filing requirement, and the fact that the SEC has oversight of Reg CF offerings, gives investors increased protection from fraud and impropriety by the startup. 

The SEC has no authority over crowdfunding if it isn’t a Reg CF offering. Other Reg CF rules include a requirement that the company issuing the offering conduct business in the United States or Canada. The startup may only issue Reg CF offerings through licensed securities brokers or an approved online crowdfunding platform. 

Investor Restrictions

Although accredited investors are allowed to take advantage of Reg CF offerings, the SEC imposes restrictions on how much they can invest based on their annual income or net worth. 

Those restrictions are:

• Investors with an annual income or net worth less than $107,000 can invest whatever is greater between a maximum of $2,200 or 5% of their net income in any 12-month period. 

• Investors with an annual income and or net worth equivalent to $107,000 or more can invest up to 10% of their annual income to a maximum amount of $107,000, whichever is greater.

Potential Investor Benefits Of Regulation CF Offerings

Reg CF offerings present several tangible benefits to investors, such as:

• Low entry-level investment minimums: Many Reg CF crowdfunding offerings are available for just a few dollars per share. By contrast, blue chip stocks can sell for hundreds or even thousands of dollars per share — a price point beyond the reach of many ordinary investors.

• Limitless upside potential: Reg CF startup offerings typically have much higher return potential than other securities or stock indexes. It’s not a stretch of the imagination to say that an investor can change the financial trajectory of their life with the right Reg CF investment. 

• Diversification opportunities: The low entry price of many Reg CF offerings also allows investors to build a diverse portfolio of startup shares without spending large amounts of capital. 

Potential Risks Of Regulation CF Offerings

All investments, including Reg CF offerings, come with risk, including:

• Longshot bets: At its core, a startup is a company with no history of success, and if it is raising funds through Reg CF offerings, the company is also short of operating capital. That makes it a long shot for success, but the high risk means it also has high upside potential.

• Equity without a voice: Buying into a Reg CF offering may entitle the investor to equity in the company, but that equity typically does not include a voice. Reg CF shares will entitle the investor to potential profits in the startup, but the investor won’t have voting rights or a say in management decisions the way corporate officers, board members or preferred shareholders might. 

• Management fees: Reg CF offerings were designed with the goal of facilitating transactions via online portals. Many equity crowdfunding platforms that offer Reg CF offerings have investor fees or other costs associated with using the platform. In some cases, those fees change from offering to offering. Investors should make sure they understand the fee structure for their Reg CF offering.   

Where To Find Reg CF Offerings?

Reg CF offerings are available through a number of reputable online crowdfunding platforms including:

• StartEngine
• Republic
• Wefunder
• SeedInvest

The offerings on these platforms will run the gamut of industries and business models. They will each have their own potential benefits and drawbacks. Likewise, each online platform and each offering will have its own operating agreement with the investor. It’s important for investors to have a full understanding of all these variables before taking part in any offering.

Are Reg CF Offerings Right For You?

Things like your tolerance for risk, the amount of capital you have to invest and your investment objectives all factor into whether a particular Reg CF offering is right for you. With that said, Reg CF offerings have tremendous upside potential. They give you the chance to get in early on the next tech titan like Amazon.com Inc. or Meta Platforms Inc. — something that was impossible 20 years ago. 

That potential comes with a comparative level of risk, which is why it’s a good thing that so many online crowdfunding platforms have offerings with buy-ins under $1,000. Theoretically, you could build your own custom mini-portfolio of Reg CF investments for a few hundred dollars. Either way, it’s an investment sector worth looking at, because Reg CF offerings are here to stay. It only takes one big score.