Small businesses seeking to raise capital by issuing equity securities often have limited options. Such companies may need to rely on crowdfunding methods to collect small amounts from a broad group of investors. Regulation Crowdfunding, also known as Regulation CF, is a securities exemption that allows small U.S. companies to conduct securities offerings.

The Securities and Exchange Commission (SEC) adopted Regulation CF in October 2015.Regulation CF was enacted under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012. The purpose was to facilitate investment opportunities for small businesses and enable a broader pool of investors to participate in the capital raising activities of small businesses.

Under Regulation CF, certain early-stage businesses are able to raise up to $5 million in any 12-month period through crowdfunding. Funds can be raised from both accredited and non-accredited investors. An accredited investor is an individual or entity that meets certain financial sophistication criteria.

In order to conduct an exempt securities offering in reliance on Regulation CF, the issuer must satisfy certain eligibility criteria. In particular, the issuer must be a privately-held U.S. company. Under Rule 503 of Regulation CF, disqualified “bad actors” are prohibited from relying on this exemption. Disqualifying events include criminal convictions and SEC disciplinary actions.

Regulation CF allows general solicitation to raise funds from potential investors. General solicitation is defined by the SEC to include any form of communication that is designed to generate public interest in a securities offering. Common methods of general solicitation include internet posts, social media outreach, newspaper advertisements, and public webinars.

Securities offered in reliance on Regulation CF must be conducted online using a SEC-registered broker-dealer or funding portal. Investors that purchase securities in a Regulation CF offering are generally required to hold the securities for at least one year before they can resell them.

Securities offered and sold pursuant to Regulation CF are exempt from SEC registration requirements. Crowdfunding offerings are conducted in reliance on Section 4(a)(6) of the Securities Act of 1933.

The issuer is required to disclose information about the securities offering and company to investors and the broker-dealer intermediary. In addition, a Form C must be filed with the SEC disclosing information about the type of securities being offered, the price, and the target offering amount. The Form C also requires disclosure of business information such as the company’s total assets, number of employees, and the company’s officers, directors, and major beneficial owners. The initial Form C must be filed prior to marketing the offering to the public. If material updates are made to the information on a previously filed Form C, the issuer must file an amendment to the Form C.

Oxeia Biopharmaceuticals provides an illustration of how crowdfunding offerings can benefit both early-stage companies and investors alike. Oxeia Biopharmaceuticals is a clinical-stagebiotech company that develops therapeutic solutions for patients with concussions. It recently launched a Regulation CF securities offering to fund drug development and other company growth initiatives. Crowdfunding can be an appealing alternative to traditional venture capital financing for many early-stage biotech startups. It also enables the general public to fund companies developing innovative medical treatments for diseases that may affect someone in their lives.