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Legal Primer for Founders
Even for repeat founders, fully understanding the nuances of securities regulations can be overwhelming. While we can’t replace your lawyer's expertise, we can give a good layperson's overview.
Wefunder supports 3 different ways to legally raise funding from investors in all 50 states under federal law: Regulation Crowdfunding, Regulation D Rule 506, and Regulation A+. Each has their own strengths.
*If you end up raising more than $5M in your Reg CF raise, we'll spin up a concurrent Regulation D, Rule 506(c) offering so you can raise an unlimited amount from accredited investors. We support 506c raises only when the issuer is also doing a Reg CF offering.
**Rich means accredited investors with $1M+ in net worth (minus their home) or who've earned more than $200K per year ($300k with spouse) in each of the past 2 years. It also means institutions like banks and VCs. Investors must verify their accredited status to invest under Reg D.
Which should I use?
Regulation Crowdfunding (Reg CF) is our bread & butter – it's used by over 90% of the companies on Wefunder. It turns your most passionate fans into investors that are a marketing force, and puts you in front of 1M+ investors on Wefunder.
Regulation D, Rule 506b is what is traditionally used by big-check angel investors and venture capitalists. It doesn't allow for 'general solicitation' – ie. you can't advertise your offering – so it's not a great fit for a raising a large crowdfunding round.
Regulation D, Rule 506c allows you to raise an unlimited amount from accredited investors and permits 'general solicitation' (advertising). We use Rule 506(c) to help you raise more than $5M (if you hit the Reg CF maximum) by moving over accredited investors into a concurrent offering.1
Regulation A+ (Reg A) is best for late-stage companies with serious traction, seeking to raise up to $75M publicly. It’s like a "mini-IPO." Since there's a hefty up-front cost & considerable legal work for Reg A+, we usually recommend founders first launch a Reg CF and then get started on the Reg A+ legal biz.
Reg CF is a law that rolled out in 2016 and just got a huge boost in 2021! It legalized the ability for anyone - not just the rich - to invest in startups. Businesses can raise capital from their friends and local communities instead of just banks or venture capitalists.
What we'll do for you:
We handle the grunt work of fundraising... so you can focus on what’s important: growing your business.
Who can invest?
Anyone can invest as little as $100 in your company! You can also advertise your fundraise to your customer list, in the press, or on social media (abiding by these rules). For most companies, Reg CF is the best way to maximize the amount invested, while allowing customers and friends the opportunity to support you.
How are investors organized?
Your entire raise will be consolidated into Special Pupose Vehicles (SPVs) – one if you don't use Early Bird terms, 2 if you do. Each SPV will take up only one line on your cap table! You'll pick one investor to be your Lead Investor and they'll act on behalf of all Wefunder investors. This will make later rounds of fundraising a breeze, while giving investors the same economic exposure and info as if they had invested directly in the company. A win-win.
Can I advertise my raise?
Absolutely! Reg CF rules allow you to advertise your raise in order to turn your friends, customers, and supporters into investors. In all communications, messaging must be factual and "non-term." The first bit is obvious – don't mislead investors. Avoid hyperbole, misleading info, or omission of important info. For instance, if someone is suing you for patent infringement, you should mention it. (Your communications must be filed with the SEC alongside your Form C, so no funny business). You also cannot include any terms of your raise.1
So, stick to factual statements or historical data and then direct people to your Wefunder pitch page to learn more. Also, prominently label any "forward looking information" or projections.
Get the full scoop on legally advertising your Reg CF raise here.
Can I fundraise off the Wefunder platform?
By law, all Reg CF investments must be made through a funding portal like Wefunder or via a broker/dealer. So you aren't able to collect checks in person – you must direct potential investors to your Wefunder pitch page. That said, you are permitted to accept in person funding from accredited investors separate from a Reg CF raise by running a concurrent Reg D, 506 (c) fundraise.2
How quickly can I start raising?
You’ll be able to launch a pitch & start spreading the word in minutes!3 This will launch your raise in its "testing the waters" phase – where you can gauge investor interest by collecting investment "reservations" prior to completing your legal work. These reservations are non-binding – investors can fund their Wefunder Cash accounts but no money is sent to you until after your legal disclosures are complete. More deets on reservations and Wefunder cash here.
You're able to ping prospective investors during TTW, but note that any public statements (emails, Facebook posts, Tweets, etc.) that you make prior to filing your legal disclosures must include these disclosures. You must also take a screenshot of each statement to file alongside your Form C.4
Once we help you finish your legal work, investors will be prompted to confirm their investments and then BOOM!5 Funding and an army of supporters ❤️
How much can I raise?
You can raise up to $5M per year under Reg CF. If you're able to raise more than $5M, we'll set up a concurrent Reg D 506(c) raise and move your accredited investors into this parallel round so you can raise more from the crowd! We handle the accreditation of your investors for you6 & spin up this parallel round free of charge.
Which types of securities can I offer?
We've got a library standard industry contracts for you to pick from – from the Y Combinator SAFE, a convertible note based on Cooley Go, & a standard revenue share template. We can also accommodate any custom contract drafted by your lawyer (for a priced round or another type of offering).
What legal work is required?
Our team will guide you through the legal requirements of your raise. Most importantly, they'll help you file a Form C with the SEC (required to collect your $$). To do so, you'll need to disclose up to 2 years of GAAP financials, along with other stats, like number of employees, officers & directors, stakeholders with more than 20% voting power, past fundraising rounds, user of funds, and any material risks.
The type of financial statements we'll need from you depends on the max amount you plan to raise. For raises up to $250K, you'll need a company officer to certify your statements. For raises up to $1.07M, you'll need them reviewed by an independent CPA. Above $1.07M, you'll need an independent audit of your statements. More deets on financial statements here.
Don't get spooked! We're primed and ready to help you every step of the way.
Am I required to file ongoing filings post-close?
1 year after your Reg CF round closes, you'll need to file an annual report which covers much of the same info as your Form C (reviewed/audited financials are not required, though).7 Most companies only need to file one annual report. Legalese here.
Footnotes for your lawyer:
1. Advertisements cannot include the terms of the offering.“Terms of the offering" include: (1) the amount of securities offered; (2) the nature/type of the securities; (3) the price of the securities; (4) the closing date of the round, (5) the progress made towards fundraising goal, and (6) the intended use of funds. Full advertising guide here.
2. If the issuer raises more than $5M and opts for a concurrent Regulation D 506(c) raise, Wefunder will handle the verification of accredited status of investors. Additionally, any public solicitation should comply with the tighter rules of Regulation Crowdfunding - see footnote #1 & these advertising guidelines.
6. Investment limits are calculated from self-reported income and net worth. Wefunder helps enforce investor limitations. The issuer is not liable unless it can be proven they know an investor lied.
If you've already received money from an angel investor or venture capital firm, you likely have already done a Reg D fundraise. There are 2 different rules under the Reg D exemption as you've seen: Reg D, 506(b) & Reg D, 506(c). We only offer the latter & only do so alongside a Reg CF raise.
Reg D is the easiest, oldest, and most-used fundraising exemption. There are no public disclosure or ongoing reporting requirements other than one simple filing called a Form D. There is also no limit to the amount you can raise.
You can advertise your raise to supporters using Reg D, 506(c), meaning you can run it seamlessly at the same time as a Reg CF.
Only accredited investors — i.e., rich people — can invest in your company.1
How Wefunder uses Reg D:
To help you raise more than $5M per year. If your company exceeds the max you are allowed to raise under Reg CF, we'll move your accredited investors to a Reg D, 506(c) round, and verify their accredited status2. This will give you more room to accept more unaccredited investors in your Reg CF offering. We do this for free.
To help investors invest directly onto your cap table. With your permission, an accredited investor can invest directly onto your cap table (and vote their own shares). We recommend a minimum $25,000 investment for any investors who want to do this.
Footnotes for your lawyer:
Regulation A+ is a new fundraising exemption that became active in late 2015, designed for later-stage companies who want to raise more funds publicly, but don’t want to do a full-blown IPO yet. It’s like a mini-IPO.
You can raise up to $75M per year from anyone.
It's expensive & time-consuming.
Before you can start fundraising and collect funds, you need to pre-file an offering placement memorandum (OPM) with the SEC. An OPM is like a business plan wrapped with a whole bunch of legal disclaimers, and can cost up to $50,000 in legal fees. For this reason, early stage or unproven companies should not use Reg A+.
Even if you think you could raise over $5M, it's often best to start off with Regulation CF. We can get you started raising money months before your Reg A+ campaign will be ready. Plus, if you first raise $5 million or more on Wefunder in a Regulation CF with a Reg D campaign, we'll waive our fees if you later do a Reg A+ offering.
How we help:
While drafting an OPM is a lot of work for your lawyer, once that’s done, we’ll handle everything else. We can work with nearly any type of security, and group all shareholders in one entity on the cap table using a custodian that will hold securities in street name.