Legal Frameworks of Crowdfunding: Reg CF, Reg A+, and Global Compliance Guide

Crowdfunding has become a pivotal method for startups and small businesses to access capital without traditional financial gatekeepers. Yet, beneath the seemingly simple process of investing small amounts online lies a complex web of legal frameworks that protect investors and ensure regulatory compliance. This article will provide a deep dive into the U.S. crowdfunding regulations—Regulation Crowdfunding (Reg CF), Regulation A (Reg A and Reg A+), Regulation D (Rule 506)—and explore comparable global regulations. We’ll also examine investor limits, reporting duties, platform obligations, and legal risks that every participant should understand.

Origins and Legal Basis

Reg CF was introduced under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 and became effective in May 2016. Its goal is to democratize startup investing by allowing non-accredited investors to participate under structured safeguards.

Issuer Requirements

• Must be a U.S.-based entity
• Can raise up to $5 million per year (as of March 2021 SEC updates)
• Must file Form C with the SEC, including detailed business information, financial statements, and risk disclosures
• Required to publish annual reports until the obligation is terminated

Investor Limits

Investment caps depend on the investor's net worth and annual income:

• If either is less than $107,000: max investment = 5% of the lesser
• If both exceed $107,000: max investment = 10%, up to $107,000 annually

Intermediary Rules

All Reg CF offerings must be conducted via FINRA-registered intermediaries, either:

• Funding Portals (e.g., Wefunder, Republic, StartEngine)
• Broker-Dealers

Intermediaries must:

• Conduct background checks on issuers
• Educate investors on the risks
• Provide a communication forum for investors and issuers

Disclosure Obligations

Companies must file:

• Form C before launching
• Form C-U to report fundraising progress
• Form C-AR for annual updates, unless they’ve exited reporting requirements

Reg A Overview

Also derived from the JOBS Act, Regulation A allows broader fundraising through a public offering exemption and is split into two tiers:

• Tier 1: Up to $20 million in a 12-month period
• Tier 2: Up to $75 million in a 12-month period (updated March 2021)

Issuer Requirements

• Available to U.S. and Canadian companies
• Requires filing of Form 1-A with the SEC
• Must undergo SEC qualification, which involves a review process
• Tier 2 issuers must provide ongoing disclosures, including semiannual reports and audited financials

Investor Rules

• Tier 1: No investment limits
• Tier 2: Non-accredited investors limited to:
  • 10% of the greater of their annual income or net worth

Trading and Liquidity

Unlike Reg CF, Reg A+ shares can be freely traded on secondary markets, offering liquidity benefits, especially for Tier 2 offerings that become public-reporting companies.

State Blue Sky Laws

• Tier 1: Subject to state securities laws in each jurisdiction
• Tier 2: Preempted from state review, simplifying national offerings

Overview

While not technically "crowdfunding" in the retail sense, Reg D offerings under Rule 506(b) and 506(c) are essential to understand as they account for the majority of private capital raised in the U.S.

Rule 506(b):

• Permits up to 35 non-accredited investors
• Cannot use general solicitation
• Requires disclosure documentation for non-accredited participants

Rule 506(c):

• Allows public solicitation
• All investors must be accredited
• Issuers must take “reasonable steps” to verify accreditation status

Accredited Investor Definition (2024)

• Income over $200,000 (or $300,000 jointly) for the past two years
• Net worth over $1 million, excluding primary residence
• Holders of certain financial credentials (e.g., Series 7, 65, or 82 licenses)

SEC and FINRA Oversight

Funding platforms must be either broker-dealers or registered funding portals, both subject to FINRA and SEC audits. Violations can result in severe penalties, including:

• Loss of registration
• Fines
• Liability for investor losses

Anti-Money Laundering (AML) and Know Your Customer (KYC)

Platforms must implement:

• Customer identification programs
• Ongoing monitoring for suspicious activity
• Suspicious Activity Reports (SARs) if needed

Communication Channels and Investor Forums

Platforms are obligated to:

• Maintain transparent communication tools
• Archive all investor communications for auditing

Advertising Rules

• Issuers can share a “tombstone ad”: a limited notice containing only the offer’s basic terms and a link to the full offering on the portal
• No forward-looking promises or testimonials are permitted outside the portal

European Union (EU)

Under the EU Crowdfunding Regulation (2020/1503):

• Effective since November 2021
• Harmonizes rules across EU nations
• Allows fundraising up to €5 million annually
• Requires authorization of platforms by national competent authorities (NCAs)

United Kingdom (Post-Brexit FCA Framework)

• Regulated by the Financial Conduct Authority (FCA)
• Introduced new consumer protections in 2023, including:
  • Enhanced risk warnings
  • Cooling-off periods
  • Higher standards for due diligence by platforms

Australia

• Regulated by ASIC (Australian Securities and Investments Commission)
• Retail investors can invest up to AUD $10,000 per issuer per year
• Issuers must raise funds via licensed CSF intermediaries

Canada

• Crowdfunding rules are provincially governed
• A harmonized framework was adopted in 2021
• Cap of CAD $1.5 million per issuer annually
• Investor limits: $2,500 per offering, or up to $10,000 with advice

Securities Fraud

False or misleading statements during fundraising are subject to Section 10(b) and Rule 10b-5 under the Securities Exchange Act. Investors can seek civil remedies or participate in class-action suits.

Liquidity Risk

Most Reg CF and Reg D securities are restricted securities, requiring:

• A 12-month holding period
• No guarantee of a secondary market

Disclosure and Reporting Failures

Failure to provide timely reports (e.g., Form C-AR) can:

• Trigger penalties
• Disqualify the issuer from future offerings
• Void investor rights

Disqualification Events ("Bad Actor" Rule)

Certain past legal violations by issuers or their executives may trigger disqualification from using Reg CF or Reg D exemptions.

Conclusion: Staying Legally Informed Is the Key to Smart Crowdfunding

For retail investors, crowdfunding can be an exciting way to engage in startup finance—but only if they navigate it with a solid understanding of the regulatory landscape. From the issuer's obligations under Reg CF and Reg A+ to investor caps, state law preemptions, and platform compliance protocols, each component serves to balance access and protection. Internationally, while the momentum is growing toward harmonization, local nuances matter significantly. Before investing or launching an offering, understanding the legal frameworks is not optional—it’s fundamental.