The Scoop on Crowdfunding Regulations
September 28, 2020
Though most people have heard of the term “crowdfunding” in passing, many do not understand what it actually means from a technical standpoint and the regulations involved. Crowdfunding is a means of raising money to expedite the
development and growth of a business. It is largely used for tech-oriented products and services, yet it is also used for conventional businesses such as farms. Crowdfunding is a tool that allows people to invest alongside
other investors in various assets, as a way to diversify their portfolio. Today, you can find crowdfunding websites or portals with a variety of different offerings.
Crowdfunding is appropriately named, as it is the synthesis of the crowd’s cooperation and financing power. The company in question, dubbed the “issuer”, raises funds from investors in the form of the crowd. This is a mutually beneficial arrangement as the business receives funding, while the crowd finances something they believe in and can profit from. Crowdfunding farmland is a newer concept and is becoming increasingly popular, as it gives investors an unconventional means of diversifying their investment portfolio with an asset class that has a proven history of being resilient and profitable. Crowdfunding is quite efficient as it typically takes place on the internet.
An added benefit of crowdfunding is the crowd does not have to have any special skill or knowledge of the company’s value offering in order to make money. Even if you have not stepped on a farm a day in your life and have no idea how to operate a tractor, you can still benefit from an investment in farmland, as your money will finance these essential operations. There are also tax benefits
Perform a deep dive into crowdfunding and you will find a litany of seemingly complex terms used such as Regulation A+, Regulation Crowdfunding, Rule 506(c), Reg. D and so on. These terms are references to United States Securities Laws exemptions that empower businesses to sell securities to investors in the form of the crowd without registering the securities. Below, we will go over the various crowdfunding regulations.
The JOBS Act of 2012 included language Reg CF, short for Regulation Crowdfunding to permit eligible issuers to raise money upwards but not in excess of $1,070,000 in a year’s time through a funding portal or broker registered with FINRA and the SEC.
There is no need for individual investors to be accredited for a Reg CF offering. However, individual investors should be aware of the limits for investment according to Regulation CF rules. In any 12-month period, individual investors have a limit of the larger of these two amounts: 5% of whichever is less between net worth or annual income and $2,200. However, if the investor’s net worth or annual income is equal to or in excess of $107,000, the limit is 10% of whichever is less between the net worth and annual income.
Regulation A+ or Reg A for short, sets the stage for small and startup companies to tap into public funding with comparably limited disclosure requirements and reduced expenses as opposed to launching an initial public offering (IPO). Reg A’s Tier 1 empowers a business to raise upwards of $20 million in a year’s time. Tier 2 empowers a business to raise upwards of $50 million in that year. Reg A offering issuers can advertise the opportunity without restriction. Furthermore, investors do not require accreditation to invest in Reg A opportunities. If the opportunity is Tier 2 and the investor is not accredited, but he or she wants to invest in a security not listed on a national exchange, the investment is limited to whichever is greater: 10% of his/her net worth or annual income.
These are the types of offerings you will typically see on FarmCek.
Regulation D or Reg D for short is relied upon for raising investment capital. Reg D has two exemptions: Rule 506(b) and 506(c). The two differ in accordance with the type of solicitation, mandated disclosures and the types of individuals eligible to invest. Shares issued under Rule 506(b) or 506(c) will be restricted and may not be sold by the purchaser for at least 6 months to a year.
You can learn more about Rule 506 of Regulation D directly on the SEC website.
Crowdfunding is not strictly limited to cutting edge tech products and services. We make it easy to invest in quality, high profit potential farmland and farm operations. We believe that this model is beneficial for investors looking to get invested in agriculture and for farmers looking for capital to continue or begin their operations. If you're interested in exploring our unique crowdfunding opportunities, you can register for a complimentary account here.
If you have any questions, please fill out our convenient online contact form and we will be in touch.
