Regulation CF, commonly referred to as “crowdfunding”, recently saw a rule change that increased the annual capital limit to $5,000,000. While many companies may entertain executing a Reg CF to raise funding – Issuers should be aware that Reg CF carries with it exorbitant offering expenses and commissions.
All Reg CF sales must execute through an SEC approved and broker dealer managed Reg CF Portal Platform. These portals typically charge between 8-10% on all capital raised by the Issuer through the Reg CF offering (and that commission does not include offering preparation expenses). Direct sales from the Issuer to investors are not allowed under Reg CF. Thus, even though the Issuer may execute a marketing campaign to their social media base or to the public – any investor leads they generate for the Reg CF Offering must be sent to the CF portal wherein they will be subject to the commissions charged.
So – not only does the Issuer have marketing costs for the offering but all sales will be subject to the portal commission. An Issuer raising $4,000,000, for example, could easily see the overall commissions and expenses for such capital exceed $400,000-$500,000.
That is expensive capital especially for early stage companies that could execute direct sales under Regulation D or Regulation A+ and spare themselves paying those commissions. Many Issuers have the ability to generate their own investor interest in their offering – thus the ability to execute direct sales, commission free, is a massive benefit of Regulation D and Regulation A+ type offerings. Further, a Regulation D or Regulation A+ offering can still be hosted on a crowdfunding type platform if the Issuer desires to have that exposure in addition to their own marketing campaign and direct sales.
While we feel Reg CF can be beneficial for smaller offerings (sub $500,000) – issuers seeking to raise over $500,000 should carefully evaluate the commission impact on their planned raise and consider a Regulation D or Regulation A+ offering as a more cost effective alternative.
Interested in executing a Regulation D or Regulation A+ offering? Call us today to discuss: (720) 586-8610.
Monday April 26, 2021
Category: Capital Formation and Regulation D
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