Choosing an exemption by how much you need to raise

The amount you need to raise narrows your choice of exemption quickly. Reg CF tops out at $5 million in 12 months, with financial statement requirements that step up at $124,000 and $618,000. Reg A+ goes to $20 million in Tier 1 and $75 million in Tier 2. Reg D Rule 506 has no cap at all, but in exchange you are raising mostly or entirely from accredited investors. Each step up buys a bigger raise with more cost, more time, and more disclosure.

Here is the ladder, smallest first, and what each rung means for the person planning the raise.

At a glance

Reg CF: three tiers inside one exemption

Reg CF lets a company raise up to $5 million from anyone in a 12-month period, counting every Reg CF sale in the prior 12 months (17 CFR 227.100(a)(1)). Within that, the financial statements you must file in the Form C depend on how much you are raising, under 17 CFR 227.201(t).

One detail decides which tier you are in, and it trips people up. The amount is not only this raise's target. It is the target plus everything you sold under Reg CF in the prior 12 months. And if you will accept money above the target, the rule uses the maximum you will accept, not the target (Instruction 1 to 227.201(t)). A raise with a $100,000 target and a $1 million maximum is a $1 million raise for this purpose.

Up to $124,000: certified financial statements

The smallest tier needs no accountant. The company files financial statements that its principal executive officer certifies as true and complete in all material respects, plus its total income, taxable income, and total tax from its most recent federal tax return, also certified by that officer. If you already have reviewed or audited statements, you must use those instead.

What it means. This is the cheapest and fastest way to raise from the public, and it is sized for a first test or a small community raise: a local restaurant, a pilot run, a product launch. The CEO is putting their own name on the numbers, so they need to be right. At $124,000, the raise has to be very efficient for the marketing cost to make sense, because a few thousand dollars of ads and content is a large share of the money.

Up to $618,000: reviewed financial statements

Above $124,000, the statements must be reviewed by an independent public accountant. A review is not an audit. The CPA asks questions and runs analytical procedures, and reports that nothing came to their attention that suggests the statements need material changes. It costs a fraction of an audit and takes weeks, not months.

What it means. This is where most first raises sit. Budget for the review, and start it early, because the statements must cover the last two fiscal years (or since inception) and the CPA cannot finish until your books are clean. Messy bookkeeping, not the review itself, is the usual cause of delay.

Above $618,000: audited financial statements

Above $618,000, the statements must be audited by an independent public accountant. An audit tests the numbers against evidence and produces an opinion. It costs considerably more, takes longer, and requires books that can survive scrutiny.

What it means. An audit is a real line item and often a month or more on the calendar. In return, audited statements carry weight with larger investors, make a later Reg A+ raise easier, and can be reused if you raise again.

The first-time issuer exception

A company that has never sold securities under Reg CF before may use reviewed statements, instead of audited ones, up to $1,235,000 (227.201(t)(3)). That is why so many first raises set their maximum at or under $1.235 million: it doubles the amount available on reviewed statements.

The exception is used up by your first Reg CF sale. A returning issuer, meaning one that has sold under Reg CF before, needs audited statements for anything above $618,000. And "issuer" includes entities the company controls or is under common control with, and any predecessor (227.100(c)), so a new entity set up by the same founders does not reset it.

What it means for a second raise. Plan the audit before you plan the campaign. A company that raised $1 million on reviewed statements and wants to raise again will need an audit even to raise $700,000. The prior raise also counts toward the $5 million cap if it closed within the past 12 months. More on the second raise is in raising again from your investors, and the investor-side limits are in Reg CF limits, explained.

Reg A+: up to $75 million from anyone

When $5 million is not enough, Reg A+ is the next step. It has two tiers (17 CFR 230.251(a)):

• Tier 1: up to $20 million in 12 months. Financial statements are not required to be audited, but the offering must be registered in every state where it is sold, which is slow and expensive. There are no ongoing SEC reports. Few issuers choose it.
• Tier 2: up to $75 million in 12 months. Financial statements must be audited, the company files ongoing reports (annual, semiannual, and current event reports), and state registration is preempted. A non-accredited investor may buy no more than 10% of the greater of their annual income or net worth, unless the securities are listed on an exchange (230.251(d)(2)(i)(C)).

Both tiers need the SEC to qualify the offering statement before you can sell, which is the biggest difference from Reg CF. That review typically takes months, and the legal and audit costs commonly run well into six figures. The process is in how Reg A+ qualification works, and the reporting that follows is in Reg A+ ongoing reporting.

What it means. Reg A+ makes sense when you need more than Reg CF allows and you have a brand or community big enough to reach thousands of investors. The fixed costs are high, so a $6 million Reg A+ raise carries most of the expense of a $40 million one. If you only need slightly more than $5 million, compare that cost against running Reg CF alongside a private raise. A company that wants to test demand first can raise under Reg CF and step up later, covered in Reg CF before Reg A+.

Reg D: unlimited, but mostly for accredited investors

Rule 506 of Reg D has no limit on how much you can raise, no SEC review, and only a short notice filing (Form D) after the first sale. The price of that freedom is who can invest.

• Rule 506(b) allows unlimited accredited investors and up to 35 non-accredited investors who are financially sophisticated, but no general solicitation. You can only raise from people you already have a relationship with. If any non-accredited investor participates, you must give them disclosure that includes financial statements. See Rule 506(b): the private raise most companies already use.
• Rule 506(c) allows general solicitation, so you can advertise, but every buyer must be accredited and you must take reasonable steps to verify it. See Rule 506(c): advertising a raise to accredited investors only.

An accredited investor, for an individual, generally means income above $200,000 (or $300,000 with a spouse or partner) in each of the last two years with the same expected this year, or net worth above $1 million excluding their home, or holding certain securities licenses such as the Series 7, 65, or 82. The full definition, including entities, is in the accredited investor glossary entry.

What it means. Reg D fits a raise of any size where the money is coming from a relatively small number of wealthy individuals, angels, or funds. It does not fit a raise built on customers and fans, because most of them are not accredited. A $20 million raise from ten investors belongs in Reg D. A $2 million raise from two thousand customers belongs in Reg CF.

Combining exemptions

You do not have to pick only one. A common structure runs Reg CF for the community and Rule 506(c) for accredited investors at the same time, which gets past the $5 million cap without the cost of Reg A+. The mechanics are in running Reg CF and 506(c) together and Reg A+ and Reg D at once.

How to choose

Start with two questions, in this order.

1. Who is going to invest? If it is customers, fans, and your community, you need Reg CF or Reg A+. If it is a small number of wealthy people, Reg D.
2. How much do you actually need? Not how much would be nice. Each tier up costs money and months, so raise the amount the plan requires. A plan that needs $900,000 fits Reg CF on reviewed statements the first time. A plan that needs $12 million from the public is a Reg A+ Tier 2 raise.

Whatever the size, the raise still needs a reason investors can get behind, which we wrote about in why a raise with no reason to build anything falls flat.

This is general information, not legal advice. The thresholds above are the current rule text as of this post; confirm them, and which exemption fits your company, with securities counsel.

FAQ

What financial statements does a Reg CF raise need?

It depends on the amount, counting Reg CF sales in the prior 12 months and using the maximum if you accept oversubscriptions. Up to $124,000, statements certified by the CEO plus tax return figures. Up to $618,000, statements reviewed by an independent CPA. Above $618,000, audited statements, except a first-time issuer may use reviewed statements up to $1,235,000.

What is the difference between reviewed and audited financial statements?

A review is limited: the CPA asks questions and runs analytical procedures and reports that nothing suggests material changes are needed. An audit tests the numbers against evidence and gives an opinion on them. Audits cost more and take longer.

Can a returning Reg CF issuer use reviewed financials above $618,000?

No. The reviewed-statements exception up to $1,235,000 is only for issuers that have never sold under Reg CF before, counting affiliates and predecessors. A returning issuer needs audited statements above $618,000.

How much can you raise under Reg A+?

Up to $20 million in 12 months under Tier 1 and up to $75 million under Tier 2. A bill to raise the Tier 2 cap has been proposed but is not law.

Is there a limit on how much you can raise under Reg D?

No. Rule 506(b) and 506(c) have no cap on the amount. The limit is on who can invest: accredited investors, plus up to 35 sophisticated non-accredited investors in 506(b) without general solicitation.

Who counts as an accredited investor?

For an individual, generally income over $200,000 (or $300,000 jointly) in each of the last two years, or net worth over $1 million excluding a primary residence, or certain securities licenses. Entities qualify under separate tests.