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regulation crowdfunding

Regulation Crowdfunding 101

Learn about the history of Regulation Crowdfunding, the types of businesses that utilize RegCF, and how investors can get started.

What is Regulation Crowdfunding (Reg CF)?

Regulation Crowdfunding, commonly known as Reg CF, is a regulatory framework introduced with the JOBS Act in 2016. This groundbreaking legislation was developed to democratize the investment industry, extending opportunities to unaccredited investors who were previously underserved. In other words, Reg CF makes it possible for anyone to invest in privately-held securities. However, investors should note that these investments can be riskier as they often involve younger and less established companies.

The Basics of Reg CF

Reg CF enables eligible businesses to raise funds by offering securities through crowdfunding. The principal rules governing Reg CF are as follows:

  • All transactions must be conducted online through an SEC-registered intermediary, either a broker-dealer or a funding portal. (Mainvest is one of these.)

  • Companies can raise a maximum aggregate amount of $5 million through crowdfunding offerings within a 12-month period.

  • There are limits on the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period.

  • Companies must disclose pertinent information to the Commission, investors, and the intermediary managing the offering.

Additionally, investors should be aware that securities bought through a crowdfunding transaction generally cannot be resold. And of course, there are "bad actor" disqualification provisions in place to protect all parties involved.

Historical Context of Reg CF

The Securities Act of 1933 traditionally required the offer and sale of securities to be registered, unless an exemption applied, with the goal of protecting investors from highly speculative securities. The JOBS Act of 2012 created such an exemption for specific crowdfunding transactions. Coming out of an era of high-growth startups ("unicorns"), it became clear that limiting startup and small business investment to accredited investors like angel investors, VCs, and institutional investors was only further contributing to wealth inequality. With RegCF, unaccredited investors- meaning everyday people- would have the ability to invest in startups and private businesses that were previously only accessible to the super-rich. Consequently, the Commission adopted Regulation Crowdfunding in 2015, paving the way for eligible companies to start raising capital using Reg CF from May 16, 2016.

Common Business Types and Investment Vehicles in Reg CF

A broad spectrum of businesses, including start-ups, small businesses, and growth-stage companies, can leverage Reg CF to access capital. The types of securities commonly offered include equity shares, convertible notes, debt securities, and revenue share agreements.

  • Revenue share agreements: Companies share a percentage of future revenues with investors until a predetermined multiple of the initial investment is paid back.

  • Equity shares: Companies offer a piece of their business in exchange for investment. As shareholders, investors may receive dividends and can benefit from the appreciation of the company's value.

  • Convertible notes: These are loans that convert into equity in the future, often at a discount rate. They are typically used by start-ups when the company’s valuation is difficult to ascertain.

  • Debt securities: Investors lend money to the company for a fixed period, and in return, the company promises to pay interest and repay the principal amount.

Key Considerations for Investors

Reg CF represents a new and exciting avenue for investment, but as with any financial decision, it's important to thoroughly understand the risks and rewards.

  • Due Diligence: Investors should carefully review the company's disclosures and conduct their own research before investing.

  • Risk vs. Reward: Startups and small businesses may offer significant potential for returns but are also associated with a higher degree of risk.

  • Liquidity: Securities purchased through Reg CF are considered illiquid, meaning that they cannot be sold.

  • Portfolio Diversification: It may be beneficial to diversify investments across multiple companies or strategies. Always refer to your investment advisor when pursuing a new investment strategy or opportunity.

Introduction to Mainvest

Mainvest is a Regulation Crowdfunding Funding Portal regulated by FINRA. While many Funding Portals focus on startups, Mainvest focuses specifically on Main Street small businesses that have traditionally struggled to access capital.

The Revenue Sharing Note

Mainvest's revenue sharing note is a type of financing that allows small businesses to raise capital from their local communities. With this funding option, businesses pay back investors a percentage of their quarterly revenue until the investment is repaid. This approach aligns the incentives of the business and its investors, as investors benefit directly from the success of the business. Unlike equity financing, which involves selling ownership stakes in the company, revenue sharing notes do not dilute the ownership of the business. This means that small business owners can retain full ownership and control of their company while still accessing the capital they need to grow. Additionally, the revenue sharing note is a flexible financing option that allows businesses to adapt to changing market conditions and manage their cash flow more effectively than they’d be able to with traditional term loans. Learn more here.

As always, it's advisable to consult with a financial advisor or conduct extensive research before making investment decisions. Mainvest does not recommend securities nor provide investment advice. All investment involves risk. Do not invest more than you can afford to lose.

posted June 14, 2023
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