The Angel Investor's Guide to Reg CF Investment Limits
September 1, 2022
As an accredited investor, you're probably well aware of the different investment requirements that apply to you under Reg CF. But what exactly are Reg CF investment limits and how do they work?
If you're not familiar with Reg CF, it's the regulation that governs crowdfunding investments. And one of the key things it does is set limits on how much money investors can put into a given project. For accredited investors, those limits are higher than for non-accredited investors.
So if you're looking to invest in a crowdfunded project, it's important to know the Reg CF investment limits and how much you can contribute.
What is Regulation Crowdfunding?
While crowdfunding is a new way to raise money, it hasn’t been used to sell or offer shares from a business. This is because doing so could require registration with the Securities and Exchange Commission, and not all offers or sales of stock are exempt.
The 2012 JOBS Act made it possible for businesses to raise capital through online investment portals. These online platforms allow companies to offer and sell stock to the public without registering with the SEC.
The SEC was tasked by Congress with implementing regulations that would provide new protections for investors while making it easier for small businesses to raise funding.
The risks that come with investing in startups are balanced by rules set by the SEC. Specifically, SEC regulations limit how much an individual investor can invest over a trailing 12-month period.
Below are the Regulation CF investment limits.
If the annual income or net worth of the investor is less than $107,000, then the investor is allowed to contribute which is the greater of these two options:
$2,200 across all offerings.
5% of the lesser of their annual income or net worth.
If the annual income or net worth of the investor is $107,000 or higher, then the investor is allowed to contribute which is the lesser of these two options:
10% of their annual income.
10% of their net worth.
Additionally, any investor can only invest up to $107,000 in crowdfunded startups in 12 months.
Investments made through equity crowdfunding campaigns can’t be sold or traded for one year after purchase.
Companies that rely on regulation crowdfunding have additional requirements that must be met. They are required to file with the Securities and Exchange Commission(SEC) and post annual updates on their websites. Regular updates from the company are important to keeping investors informed and up to date on the progress of their investments.
This annual report is similar to your initial offering circular and shares the key details that you hope will foster a healthy relationship with your shareholders.
In rare instances, companies may stop filing reports if they meet the following criteria:
The company is now a fully reporting SEC registrant.
The shareholder base is relatively small with only 300+ investors on record.
The company files an annual report and has no more than $10 million worth of total assets.
A company or third party buys back all the shares under 4(a)(6).
The business has shut down.
What You Should Disclose Under Regulation CF
When conducting an equity crowdfunding offering, companies are required to disclose information to both investors and an intermediary. This includes, butis not limited to, disclosing:
The price for buying or selling the shares.
The target offering amount.
The deadline is to reach your target funding goal.
Whether or not a company is willing to accept oversubscriptions to their offer.
A review of how the company is performing financially.
A description of what the business does and what the money raised will be used for.
Contact information for the key people in the company.
Other related-party transactions.
How Do These Reg CF Investment Limits Affect Your Investment in Early-Stage Companies?
These limits affect an investor's ability to make money from investing in early-stage companies in two ways.
First, the limit on the amount that can be invested in a company means that an investor cannot put all of their money into a single company and must spread their investment across multiple companies. This limits the potential upside of any one investment.
Second, the limit on the number of investors in a company means that an investor cannot own a large stake in a company and must share ownership with other investors. This limits the potential upside of an investment.
Why Did Congress Set Reg CF Investment Limits?
The answer can be found in the SEC's statement on Regulation CF:
"One of the key purposes of the investment limits in Regulation CF is to protect investors, who may be less sophisticated than accredited investors, from making unduly risky investments."
What Happens if You Exceed the Limit?
If you exceed the limit on how much you can invest in a company through crowdfunding, the excess amount will be returned to you.
New SEC Rules on Regulation CF Investment Limits
On Nov. 2, 2020, the Securities and Exchange Commission adopted amendments to the rules governing private offering exemptions, including regulation crowdfunding. The amendments are intended to facilitate the ability of companies to raise capital and to conform the rules to similar regulations adopted by other regulators.
Starting March 2021, the $1.07M crowdfunding cap will be raised to $5M. The previous limit was too low for many companies to subsist on for a full year.
Startups in Silicon Valley were limited by their $1 million cap, resulting in them not being able to rely on regulation CF as their main source of funding. But the new $50 million raised from accredited investors will allow for companies to continue to function until their next major product development, as well as provide a bit of a cushion for unforeseen slowdowns due to COVID-19.
The SEC also adopted amendments to its rules regarding investment limits on investors in crowdfunding transactions.
It removed investment limits for accredited investors.
A non-accredited investor may not invest more than their annual income or net worth.
The Securities and Exchange Commission(SEC) has amended its rules to extend the existing exemption for companies offering $250,000 or less of securities from certain financial disclosure requirements. The extension provides an additional18 months of relief from the requirement to file financial statements with the SEC.
What does all this mean for early-stage companies?
This amendment allows early-stage startups to use Regulation CF instead of a traditional 506(c) offering. This also allows non-accredited individuals to invest up to $1 million in a company.
These steps are all necessary to ensure your company is able to raise the necessary funds.
Since Regulation CF offerings are more costly for startups, such costs are compounded if the campaign does not reach its funding goal.
The new regulations allow businesses to send general information to potential customers to test the waters
This would allow businesses to weed through potential investors, and gauge their interest in purchasing their stock.
This will save businesses money by allowing them to skip the process of filing a securities registration statement with the SEC for a regulation crowdfunding campaign that would’ve ultimately been unsuccessful.
Frequently Asked Questions
How much can I raise with Reg CF?
You can raise up to $1,070,000 with Reg CF.
What is a reg CF investment?
A Reg CF investment is an investment in a company that is regulated by the US Securities and Exchange Commission. The investment limit for a Reg CF investment is $1,000,000.
Are Reg CF securities restricted?
Yes, Reg CF securities are restricted.
How much can accredited investors invest?
There is no limit to how much-accredited investors can invest in a Regulation CF offering.
If you're an accredited investor looking to invest in a crowdfunded project, it's important to know the Reg CF investment limits. By understanding the different limit tiers and how they work, you can make sure you're investing within your means and not putting too much of your capital at risk.
If you're looking to build and scale an angel investment syndicate, we can help. We have a proven track record of helping startups raise capital and grow their businesses. Contact us today to learn more about how we can help you reach your goals.
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