The 4 Types of Equity Crowdfunding for Startups

If you’re relatively new to the the world of crowdfunding and startups, you’ve probably heard the terms Reg. CF and Reg. A+ nonchalantly thrown around by investors who’ve been around the block a time or two.

I know what you’re thinking: No, they aren’t your disparate middle school grades. And yes, it’s a teensy bit pretentious to use those terms in a sentence assuming everyone knows the minutiae behind them.

I don’t do pretentious. So let’s clarify: Reg. CF and Reg. A+ are the two most common types of equity crowdfunding used by startups to raise capital.

Actually, there are four main categories of crowdfunding rounds:

Reg CF: Getting started

Reg. CF stands for Regulation Crowdfunding, and allows companies to raise up to $5 million — up from the old limit of just over $1 million, thanks to new regulations put into place a few years ago — in any given 12-month period from accredited and non-accredited investors in the United States.

Reg CF rounds are a fantastic option for early-stage startups looking to raise a relatively small amount of money without registering with the U.S. Securities and Exchange Commission (SEC). That said, Reg. CF rounds can only offer and sell securities to investors through an SEC-registered intermediary such as StartEngine, Wefunder, or Republic. They also require companies to disclose certain information to investors, including financial statements and business plans.

Side note: Unless you’re mimicking your own echo, don’t call it “Reg. CF crowdfunding.” That’s like saying “ATM machine.”

Reg A+: Upping the ante

Reg A+ is short for…uh…Regulation A+ equity crowdfunding. Think of this type of crowdfunding as a “mini-IPO” allowing startups to raise up to $75 million over a 12-month period, again from both accredited and non-accredited investors in the U.S.

Reg A+ rounds provide larger startups a way to raise significantly more capital while avoiding the cost and time required for a traditional IPO. But they also come with additional restrictions, including the need to file an offering circular with the SEC, and to comply with certain ongoing financial reporting requirements.

Reg D: Unlimited capital — with one big catch

Reg D, or Regulation D equity crowdfunding, enables companies to raise an unlimited amount of capital, again without the need to register with the SEC. Companies that pursue Reg D rounds are also exempt from publicly disclosing detailed financial statements and business plans to investors. That’s great for the companies from a simplification standpoint, but also makes it more difficult from an investor’s perspective to gauge the success and progress of your stake.

That said, there’s one big catch for companies looking to pursue this type of equity crowdfunding: Reg D capital can only be raised from accredited investors in the United States. You can read more about the SEC’s investor accreditation requirements here.

Reg S: An international stage

Finally, Registration S equity crowdfunding opens the door for companies to raise capital from investors outside the U.S.

Sometimes called the international sibling of Reg D, Reg S rounds similarly have no limit to the amount of capital that can be raised.

But Reg S also notably excludes U.S. investors, which can significantly dampen demand and potential secondary markets (Reg S securities cannot be resold to U.S. investors, either). Companies must also remain compliant with the local regulations and laws in each country where securities are sold.

Your Bottom Line

The vast majority of crowdfunded startups I cover here at Bottom Line Investing will be of the Reg CF and Reg A+ varieties. These tend to be the kind of early-stage businesses I love, and the financial reporting requirements involved with Reg CF and Reg A+ rounds make it significantly easier to analyze their potential and progress.

In the end, that tends to be much better for everyone’s bottom line.