The rise of crowdfunding as an alternative financing model has democratized access to investment opportunities for startups and small businesses while providing everyday people a chance to participate in the growth of innovative companies. Regulation Crowdfunding (Reg CF) is a set of rules established by the U.S. Securities and Exchange Commission (SEC) that allows eligible businesses to raise capital through crowdfunding from non-accredited investors.
This article aims to provide a comprehensive overview of the process of becoming a registered crowdfunding platform under Reg CF. We will delve into the common myths and challenges associated with the process, with extra emphasis on the technological requirements for the crowdfunding portal. By the end of this article, readers will gain a better understanding of the steps involved in becoming a registered crowdfunding platform and feel confident in undertaking this task.
The Rise of Crowdfunding and Reg CF
Crowdfunding has experienced significant growth in recent years, fueled by the increasing popularity of platforms like Kickstarter and Indiegogo.
According to a report by Research and Markets, the global crowdfunding market was valued at $17.95 billion in 2022 and is projected to reach $59.4 billion by 2030, growing at a CAGR of 16.1% from 2022 to 2030. The implementation of Reg CF in 2016 has further expanded the crowdfunding landscape, with nearly $17.2 billion raised through crowdfunding platforms annually.
What is Reg CF?
So what even is Reg CF? Glad you asked! Regulation CF, also known as Crowdfunding, is a game-changing regulation that was introduced by the Securities and Exchange Commission (SEC) in 2015. This was part of the JOBS Act! Thanks, Obama!
It has opened up a whole new world of investment opportunities for individual investors, while also providing small businesses and startups with easier access to capital. This regulation allows companies to raise up to $5 million in a 12-month period, with individuals being limited in how much they can invest based on their income and net worth.
The Legal Process of Becoming a Registered Crowdfunding Platform under Reg CF
Register as a funding portal with the SEC: Registering as a funding portal with the SEC involves completing and submitting the Funding Portal Registration Form (Form Funding Portal) through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. This form requires information about the platform’s owners, management, business model, and operational policies.
Become a FINRA member: Funding portals must also become members of the Financial Industry Regulatory Authority (FINRA), which oversees broker-dealers and crowdfunding platforms in the United States. To apply for FINRA membership, crowdfunding platforms must complete the New Organization Membership Application (Form NMA) through FINRA’s Membership Application Program (MAP) Gateway.
Develop written policies and procedures: Crowdfunding platforms must establish written policies and procedures to ensure compliance with federal securities laws and FINRA rules. These policies should cover topics such as investor protection, anti-money laundering, privacy, data security, recordkeeping, and communication with issuers and investors.
Implement investor protection measures: Registered crowdfunding platforms are required to implement certain investor protection measures, such as conducting background checks on issuers, ensuring that offerings comply with Reg CF rules, monitoring investor limits, providing educational materials to investors, and maintaining a communication channel for investors and issuers.
Maintain accurate records: Platforms must maintain accurate and up-to-date records, including financial statements, offering materials, investor data, and communications with issuers and investors. They must also provide these records to the SEC and FINRA upon request.
Comply with ongoing reporting and regulatory requirements: Once registered, crowdfunding platforms must comply with ongoing reporting and regulatory requirements, such as annual reports, financial audits, and periodic examinations by FINRA.
Is Reg CF Required for ALL Crowdfunding Platforms?
Not all crowdfunding platforms need to be registered under Reg CF. Regulation Crowdfunding (Reg CF) specifically governs equity crowdfunding, where businesses raise capital by offering and selling securities to non-accredited investors. However, there are other types of crowdfunding that do not fall under the purview of Reg CF:
- Donation-based crowdfunding: Platforms like GoFundMe and Kickstarter facilitate crowdfunding campaigns where individuals or organizations raise money for projects, causes, or personal needs. In these cases, contributors do not receive equity or a financial return on their investment. Donation-based crowdfunding platforms do not need to be registered under Reg CF.
- Rewards-based crowdfunding: Platforms like Kickstarter and Indiegogo also host rewards-based crowdfunding campaigns where backers receive non-monetary rewards or products in exchange for their financial support. These platforms do not involve the sale of securities and are not subject to Reg CF registration requirements.
- Accredited investor crowdfunding: Some platforms, like AngelList and CircleUp, facilitate investment opportunities exclusively for accredited investors, who meet specific income or net worth criteria. These platforms operate under different regulatory frameworks, such as Regulation D, and do not need to register under Reg CF.
Common Myths and Challenges
Becoming a registered crowdfunding platform under Reg CF can be a complex process, and many myths and challenges surround this endeavor. Here, we debunk some of the most common myths:
Myth 1: Only large companies can create a successful crowdfunding platform.
Fact: While it is true that resources are required to establish and maintain a compliant crowdfunding platform, even small companies with a clear vision and a dedicated team can create a successful platform.
Myth 2: The process is too complicated, and only experts can navigate it.
Fact: While the process can be complex, with a thorough understanding of the regulatory landscape and proper guidance from legal counsel and compliance professionals, businesses can successfully navigate the process.
Myth 3: The cost of becoming a registered crowdfunding platform is prohibitive.
Fact: While there are costs involved, such as application fees and ongoing regulatory expenses, the long-term benefits of running a compliant crowdfunding platform can outweigh these costs, making it a worthwhile investment.
Now, let’s discuss some common challenges encountered by those seeking to establish a registered crowdfunding platform:
Challenge 1: Navigating regulatory requirements.
Complying with the rules and regulations set forth by the SEC and FINRA can be a significant challenge, requiring specialized expertise and considerable time investment. Many IgnitionDeck customers work with our partner, North Capital, to navigate this challenge.
Challenge 2: Developing policies and procedures.
Creating a comprehensive set of written policies and procedures that address investor protection, anti-money laundering, privacy, data security, record-keeping, and communication with issuers and investors can be daunting.
Challenge 3: Building trust and credibility
New funding portals may face challenges in establishing trust and credibility with potential investors and issuers, as well as competition from established crowdfunding platforms.
Technological Requirements for a Crowdfunding Portal
Building and maintaining a secure and user-friendly crowdfunding platform is crucial for success. You could simply use IgnitionDeck to do most of the heavy lifting for you. Short of that, here are some key technological requirements to consider:
User interface and experience: The platform should provide a seamless user experience for both investors and businesses seeking funding, with intuitive navigation, clear information display, and easy-to-use features. Again, IgnitionDeck handles this for you.
Data security: Ensuring the security of users’ personal and financial information is paramount. Implement robust data encryption, secure sockets layer (SSL) certificates, and other security measures to protect sensitive data. Most modern web hosting providers offer free SSL certs, like Pantheon Hosting, or even Blue Host.
Record-keeping: Platforms must maintain accurate and up-to-date records and be able to provide these records to the SEC and FINRA upon request. Investing in reliable database solutions and backup systems is essential.
Communication channels: A communication channel must be provided for investors and issuers to ask questions and receive answers. Incorporating features like messaging systems, discussion boards, or live chat can facilitate communication.
Integration with third-party services: Platforms may need to integrate with various third-party services, such as payment gateways, identity verification services, and anti-money laundering (AML) compliance tools, to ensure smooth operations and compliance.
Becoming a registered crowdfunding platform under Reg CF can be a challenging but rewarding endeavor. By understanding the process, debunking common myths, addressing challenges, and meeting technological requirements, businesses can successfully establish a compliant crowdfunding platform that benefits both investors and issuers.
With the right approach, dedication, and resources, businesses can navigate the complexities of registering a crowdfunding platform and contribute to the democratization of investment opportunities in innovative startups and small businesses. By providing a secure and user-friendly platform, they can play a significant role in the ongoing growth of the crowdfunding market and help create a brighter future for entrepreneurs and investors alike.