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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.

**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. Technically, 35 non-rich unaccredited investors are allowed.

***There is a variant of Regulation D (Rule 506c) that permits advertising, if investors are verified as accredited. We support 506c raises only when the issuer is also doing a Regulation Crowdfunding offering. 


Which should I use?

Regulation Crowdfunding 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 900K investors on Wefunder.

Regulation D, Rule 506b is used if you want invite accredited investors that you already know to invest in you – and be placed placed directly on your cap table.

Regulation D, Rule 506c helps you raise more than $5M (if you hit the Regulation Crowdfunding maximum) by moving over accredited investors into a concurrent offering.1

Regulation A+ is best for late-stage companies with serious traction, seeking to raise up to $75M publicly. It’s like a "mini-IPO."



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.

Pros:

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.

Your entire raise will be consolidated into SPVs – one if you don't use Early Bird terms, 2 if you do. Each will take up only one line on your cap table! This will make later rounds of raising a breeze, while giving investors the same economic exposure and info as if they had invested directly in the company. A win-win.

You’ll be able to launch a pitch & start spreading the word in minutes!3 Supporters can begin reserving spots in your round immediately. These reservations are non-binding – no money is sent to you yet. Once we help you finish your legal work, investors will be prompted to confirm their investments and then BOOM!4 Funding and an army of supporters. ❤️

Cons:

A Form C must be filed with the SEC for you to collect the money you raise. You’ll need to disclose up to two years of GAAP financials5, along with other items, like number of employees, officers & directors, stakeholders with more than 20% voting power, past fundraising rounds, use of funds, all material risks. We can guide you through this in one phone call and then generate a Form C for you.


Things to note:

There are other limitations that are not necessarily major weaknesses but are good to be aware of. They include:

No offline crowdfunding. By law, all Regulation Crowdfunding investments must be made through a funding portal like Wefunder or a broker/dealer. So you can’t collect checks in person — instead, you must direct potential investors to your Wefunder pitch. However, you are allowed to accept funding in person from accredited investors investing in a concurrent Reg D fundraise.6

Advertisements must be factual and "non-term." This first part 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. (All info you provide will be sent to the SEC database.)7 Stick to factual statements or historical data, and avoid "forward looking information" or projections. Secondly, your communications can't include any terms of your raise.8

Get the full scoop on advertising your offering within legal rules here.

Annual Reports. A year after your round closes, you're expected to file an annual report updating your investors. If you neglect to do so, you will be unable to fundraise with Reg CF again until you file the annual report (however, you may still raise funds from accredited investors with Reg D).9


Footnotes for your lawyer:

  1. 1. 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 #6. 

  2. 2. Our library includes industry standard investment contracts like the Y Combinator SAFE & convertible note based on Cooley Go. However, Wefunder can handle any type of custom security.

  3. 3. All of your public statements (emails, Facebook posts, tweets, etc.) made before you file your legal disclosure, must include these required disclosures. You must also take a screenshot of each of statement – they'll be filed with your Form C. You cannot mention any terms of the offering in these statements & and must instead direct potential investors to your Wefunder pitch page to see them. All advertising guidelines here.

  4. 4. Before investments become official, you'll need to complete a Form C. Then, investors will be required to confirm their investments. The law requires you to wait at least 21 days after filing your Form C to withdraw any funds. 

  5. 5. Financial numbers that must be disclosed include assets, cash, accounts receivable, short term debt, long term debt, revenues, cost of goods, taxes paid, and net income. Financials are certified by CEO if raised under $250K. Otherwise, financials must be reviewed by an independent CPA. Audited financials are required for a Regulation Crowdfunding raise that surpasses $1M.

  6. 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.

  7. 7. During the fundraise, the SEC requires periodic fundraising progress updates on Form C-U and any amendments to the offering statement on Form C/A. We file these automatically based on information the issuer provides.

  8. 8. 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.

  9. 9. Annual reports terminate after 1 year if there are fewer than 300 shareholders. All investments on Wefunder, made under a single set of terms, will be aggregated into 1 SPV & count as one shareholder.  Filing the annual report is not a condition of the exemption.  The report includes financial statements self-certified by the CEO as well as a business discussion. No review or audit is required.


If you've already received money from an angel investor or venture capital firm, you likely have already done a Reg D fundraise.

Pro:
This is the easiest, oldest, and most-used fundraising exemption. There are no public disclosure or ongoing reporting requirements other then one simple notification called a Form D. There is also no limit to the amount you can raise.


Con:
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 investor who want to do this.

Footnotes for your lawyer:

  1. 1. It's legal to accept up to 35 unaccredited investors under Regulation D, Rule 506(b).  However, there are prohibitive and costly state laws that vary in all 50 states, which make it very rarely a good idea to do.  Wefunder Inc. will only close a Regulation D round with unaccredited investors if a letter is provided from a law firm that attests that state laws have been followed. Otherwise, the company must file for a Regulation Crowdfunding round to raise on Wefunder.

  2. 2. In a Regulation D, Rule 506(c) round, Wefunder verifies that all investors are accredited.


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.

Pro:
You can raise up to $75M per year from anyone.

Con:
It's expensive.

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.

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