Crowdfunding Under Regulation CF: A Path to Capital, and Alternatives for Canadian Issuers

Crowdfunding Under Regulation CF: A Path to Capital, and Alternatives for Canadian Issuers

Crowdfunding has emerged as a powerful tool for businesses to raise capital, leveraging the internet and social media to connect with many investors for relatively small individual investments. The Jumpstart Our Business Startups (JOBS) Act of 2012 introduced Section 4(a)(6) of the Securities Act, establishing a registration exemption for certain crowdfunding transactions, which the SEC implemented through Regulation Crowdfunding (Regulation CF) in 2015.

Understanding Regulation Crowdfunding (Regulation CF)

Regulation CF permits eligible companies to offer and sell securities to both accredited and non-accredited investors. Key features of Regulation CF include:

Capital Raising Limit: An issuer can raise a maximum of US$5 million within any rolling 12-month period through Regulation CF offerings.

Investment Limits: While accredited investors have no investment limits, non-accredited investors are subject to limitations based on their annual income and net worth. For individuals with less than US$124,000 in income or net worth, the limit is the greater of US$2,500 or 5% of the greater of their annual income or net worth. For those with both income and net worth of at least US$124,000, the limit is 10% of the greater of their annual income or net worth, not to exceed US$124,000. These dollar thresholds are subject to periodic adjustments by the SEC for inflation.

Intermediary Requirement: All Regulation CF offerings must be conducted exclusively online through a single SEC-registered broker-dealer or funding portal.

Disclosure Requirements: Issuers must file an offering statement on Form C with the SEC, providing detailed information about the company, its business plan, use of proceeds, and financial condition. The level of financial statement review or audit depends on the offering amount.

Regulation CF for Canadian Issuers: Challenges and Strategies

A significant limitation of Regulation CF is its ineligibility for non-U.S. issuers. This directly impacts Canadian companies seeking to raise capital in the U.S. under this exemption. However, there are potential strategies that Canadian issuers can explore:

Creating a U.S. Holding Company or Licensing Model: Similar issues arise with a U.S. holding company. Creating a new U.S. company that licenses the foreign company’s product or service might be a more promising option, but it heavily depends on the specific facts and circumstances, ensuring proceeds are used for the new company’s operations and addressing any potential “predecessor” issues..

Redomiciling to the U.S.: While technically an option, redomiciling to the U.S. can have significant tax consequences in the original Canadian jurisdiction and may require two years of audited or reviewed financial statements prepared under U.S. GAAP and U.S. GAAS.

Forming a U.S. Subsidiary: A Canadian issuer can form a U.S. subsidiary to make the offering under Regulation CF. Crucially, the funds raised by the U.S. subsidiary must be legitimately used for the subsidiary’s own purposes and cannot be upstreamed to the Canadian parent. If funds are channeled to the parent, the parent could be considered a “co-issuer,” which would make the offering ineligible for Regulation CF. If the U.S. subsidiary takes over a portion of the parent’s business, predecessor financial statements (U.S. GAAP and U.S. GAAS) may be required.

Regulation A+ as an Alternative for Canadian Issuers

For Canadian issuers seeking to access U.S. investors, Regulation A+ often presents a more viable alternative than attempting to fit into the stringent requirements for Regulation CF through complex structuring. Regulation A+ allows issuers to raise up to US$75 million in a 12-month period. Unlike Regulation CF, Regulation A+ does permit non-U.S. issuers to qualify, provided their principal place of business is in the U.S. or Canada. While Regulation A+ offerings are subject to SEC review and qualification, they offer a pathway to broader investor access and larger capital raises compared to Regulation CF. However, Regulation A+ also comes with its own set of requirements, including the need for a bona fide principal place of business in the U.S. for a U.S. entity or Canada for a Canadian entity.

Navigating the complexities of U.S. securities regulations for capital raising requires careful consideration of an issuer’s specific circumstances and objectives. Canadian issuers looking to tap into the U.S. investment market should consult with legal counsel to determine the most appropriate exemption and structuring strategy for their offering.

Disclaimer: This blog post provides general information and is not intended as legal advice. The content is for informational purposes only and does not create an attorney-client relationship. Laws and regulations in this area are complex and constantly evolving. For advice specific to your circumstances, please consult with a qualified legal professional.