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Reg A vs Reg D vs Reg CF what’s the difference

The USA crowdfunding market is ranked 1st regionally and 2nd globally mainly  thanks to adequate up-to-date regulation provided by the SEC. According to the Cambridge report, more than 70% of players consider the current legislative framework appropriate for their platform activities.

And it’s a great indicator compared to other countries.

The SEC keeps simplifying and harmonizing the set of rules to benefit every party – platforms, fundraisers and investors.

For instance, three months ago the body introduced rule amendments to Reg A, Reg D, and Reg FC offerings.

These changes are to make guidelines more rationale and less complex.

If it’s the first time you hear the regulation alphabet, or you need more clarity to this question, let us explain to you the difference Reg A vs Reg D vs Reg CF. 

Reg A and Reg D: how the SEC regulates exempt offerings

US- and non-US-based companies can offer and sell securities under Reg A and Reg D. Both sets of rules are exemptions of the “Securities Act”.

Reg D offerings have always been more popular among fundraisers.

The SEC reports about a steady growth of Reg D offerings during the past years. This model accounts for a larger offering market share.

For example, in 2019, under Reg A there was only $1b raised while Reg D offerings amounted for +$1.5 trillion.

What should you know about exempt securities offerings regulation?

Reg A (Reg A+) consists of two tiers (Tier 1 and Tier 2) allowing companies to conduct “Mini-IPOs” distinguished by the upper limit of offerings:

Tier 1 enables businesses to collect up to $20m in a 12-month period;

Tier 2 – up to $50m (going to increase up to $75m soon) in a 12-month period.

At rest, companies may comply with standards established for this type of offerings – issuer, investor and SEC filing requirements, disclosure, restrictions of resale, etc. 

Due to new rules, general solicitation for Reg A is to be replaced with “Demo Days” and similar events soon.

70% of all Reg A-based offerings are registered under Tier 2.

The SEC has analysed all issuers in qualified Regulation A offerings and concluded that the majority of them are small (based on assets and revenues) and relatively young.

93% of offerings were equity-based and 80% of them were conducted on a continuous basis.

The largest part of offerings (53%) is concentrated in the finance sector – finance, insurance, and real estate.

Often, REITs, holding companies, non-depository credit institutions, and commercial banks act as financial issuers.

As for non-financial issuers, the majority of players provide business services including software.

An estimated timeline for Reg A crowdfunding offerings: 2-4 months, max allowed time – 12 months.

Some examples of the Reg A portals are:

  • SeedInvest
  • WeFunder
  • Banq

Now let’s talk about Regulation D or accredited crowdfunding.

The set of exemptions were adopted in 1982 to simplify rules that existed at that time and strengthen investor protection.

Initially, Reg D included three rules: Rule 504, Rule 505, and Rule 506. In 2017 Rule 505 was abolished. The current Reg D framework consists of Rule 504, Rule 506 (b) and 506 (c).

How do the Reg D rules differ?

Rule 504 is for securities offers and sales of up to $5m in a 12-month period. Reporting companies, investment companies, and certain development-stage companies can’t issue securities under Rule 504. Also, issuers may not use general solicitation or advertising to market the securities.

Rule 506 (b) is a “non-exclusive safe harbour” enabling issuers to offer and sell an unlimited amount of securities. 

There are some conditions for issuers to meet:

  • offers don’t imply general solicitation or advertising
  • only accredited investors take part in deals
  • the max number of non-accredited investors – 35

Rule 506 (c) is more loyal to issuers: no limitation on amounts offered, general solicitation and advertising are allowed. Only if backers are accredited.

Reg D offerings market statistics:

  • in 2019, out of all the Reg D offering types almost all the capital was raised under Rule 506 (b)
  • almost 40% of Reg D issuers are private funds, real estate – 25.5%, tech – 20%
  • most Reg D issuers are located in California or New York
  • 9% of all issuers are non-US-based
  • most issuers tend to be small-scale with revenue less than $1m
  • the majority of non-fund issuers raise funds through equity
  • Reg D offerings are way popular than public equity or debt offerings
Source: Capital raised through different models of offerings

An estimated timeline for Reg D offerings: 100 days.

Some examples of the Reg D portals are:

  • FundersClub
  • AngelList
  • CircleUp

Title III of the JOBS Act and retail crowdfunding

Reg CF crowdfunding defines the requirements for offering and selling securities under Section 4(a)(6) added by Title III of the JOBS Act to the Securities Act.

Despite COVID-19, during 2019-2020 capital commitments to Reg CF issuers rose by 77.6%. The number of investors increased too.

Experts believe it happened due to several factors including industry development, investor education, regulatory changes.

Characteristics of the Reg CF: 

  • the maximum aggregate amount of funds to raise – $1.07m in a 12-month period (will be increased to $5M)
  • all deals should take place on a registered provider – broker-dealer or Reg CF funding portal
  • investment limitations based on an annual income and net worth;
  • bad actors’ disqualification
  • disclosure of information in filings is required

According to new rules which are to go into effect in March, the offering limit will be increased up to $5m, investment limits for accredited backers will be removed. Also, the SEC will extend the existing temporary relief providing an exemption up to 18 months for issuers offering $250k or less of securities and allow the latter to use SPVs to facilitate investing.

The general solicitation will be replaced with “testing the waters”.

Characteristics of crowdfunding issuers and offerings:

  • in 2019, most offerings (90%) were conducted through Reg CF funding portals; 
  • a typical fundraiser is small and early-stage with $30k of assets, $4k holdings and no revenue;
  • average amount raised per offering in 2020: $342k;
  • equity deals prevail over debt and SAFE, their share accounts for 48%
  • top industries: restaurants, diversified media, personal services, etc.
  • the majority of offerings are made in California followed by New York, and Texas;
  • an average cost of a crowdfunding campaign is  5.3% of the amount raised;
  • a median timeline for a crowdfunding campaign under Reg CF – 60-90 days

Some examples of the Reg CF portals are:

  • SeedInvest
  • InfraShares
  • FlashFunders
  • Republic
  • WeFunder

Comparing Reg CF vs Reg A and Reg D crowdfunding offerings 

There are tons of summary tables on US regulatory frameworks for securities offerings on the web, so we decided not to duplicate this information.

Instead, we’ll summarize how offerings differ by their characteristics. Note, all the numbers are rough estimation of the available data presented in the official reports and open data banks.

CharacteristicsReg AReg DReg CF
Typical issuersmall and relatively youngsmall-scale with revenue less than $1msmall and early-stage 
Mean offer size$26m$58m$208k
Top industriesfinance, manufacturing, servicesprivate funds, real estate, tech, health care, bankingrestaurants, diversified media, personal services
Average offering timeline2-4 months3-4 months2-3 months
Average offering cost12% of the capital raised10% to 12% of capital raised5.3% of the amount raised

Automating SEC reporting and compliance

LenderKit, a crowdfunding software for regulated investment businesses, has recently partnered with SECfly which is an SEC filing and reporting automation and service provider.

SECfly helps crowdfunding and investment platforms submit various forms to the EDGAR filing system be it new portal registration forms or deal registration forms under different regulations.

Final thoughts

Regulation is a crucial factor of the finance industry success. Over the past decade regulatory requirements in the US have evolved to keep pace with a rapidly developing complex market of alternative financing.

As crowdfunding providers strive to keep pace with ever-changing regulation, they’re turning to smart solutions assisting them in addressing this issue.

LenderKit is our in-house investment management software developed for US-based crowdfunding businesses.

It helps you launch an equity or debt funding portal or broker-dealer platform under the Reg CF, Reg A or Reg D.

LenderKit software package includes features for automating key capital raising processes and flows – creator and investor onboarding, investment management, transactions and reporting, payment processing via third-party, KYC/AML verification, and more.

LenderKit is suitable for both public and private fundraising and its functionality allows choosing the capital raising method.

In a bundle with LenderKit you get: a marketing website, investor portal, admin back-office which can be customized according to your needs and regulations with the help of our parent company JustCoded.

Want to test the feel and look of LenderKit? Schedule a demo.

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Please note that this article is for informational purposes only, don’t consider it as legal advice or recommendation. Speak with your lawyer and consult only official resources regarding any up-to-date information on the regulations and policies.

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