Understanding the Legal Rules Behind Crowdfunding
Crowdfunding allows startups, nonprofits, and creative projects to raise capital from many small investors online. However, this financing method is subject to federal securities laws and oversight by the U.S. Securities and Exchange Commission (SEC). Businesses that fail to follow SEC regulations—or use unregistered platforms—risk penalties, investor disputes, and long-term reputational damage. This blog explains the legal framework governing crowdfunding campaigns.
What Laws Govern Crowdfunding in the United States?
Crowdfunding is primarily regulated under Regulation Crowdfunding (Reg CF), allowing eligible companies to offer and sell securities through approved online intermediaries.
Under Reg CF, businesses can raise up to a set limit annually (as of 2025, $5 million) from accredited and non-accredited investors, provided they:
- Use an SEC-registered funding portal or broker-dealer;
- Disclose offering details, financials, and risks through Form C; and
- Adhere to ongoing reporting requirements after the offering closes.
Other relevant frameworks include Regulation A, which permits larger offerings with tiered disclosure requirements, and Regulation D, which is often used for private placements to accredited investors.
Who Can Participate in Crowdfunding and What Are the Limits?
For issuers: Only U.S. companies can raise funds under Reg CF, and they cannot already be public reporting companies. Disqualified issuers, such as those with securities violations, are barred from participation.
For investors: The SEC limits individual investments in a 12-month period based on their income and net worth to reduce risk exposure. These restrictions balance open access with investor protection.
What Disclosures Are Required for Crowdfunding Campaigns?
Transparency is central to SEC regulation. Companies must file Form C before soliciting investors, detailing:
- The company’s business and financial condition
- The terms of the offering (price, target amount, deadline)
- Risk factors
- Ownership structure and intended use of funds
Investors must have continuous access to this information through the crowdfunding portal. Companies are also required to update investors on material changes and provide annual reports until the securities are no longer outstanding.
Failing to disclose key details or making misleading claims can lead to SEC enforcement actions and civil liability.
Common Legal Risks in Crowdfunding
Despite its accessibility, crowdfunding carries several legal pitfalls:
- Unregistered offerings: Conducting a securities sale outside of SEC-registered portals violates federal law.
- Incomplete filings: Missing or inaccurate disclosures can invalidate an offering.
- Misuse of funds: Using proceeds for purposes not disclosed to investors can lead to allegations of fraud.
- Intellectual property exposure: Publicly posting details of inventions or business models can expose trade secrets.
Working with experienced legal counsel helps ensure compliance with both federal and state “blue sky” laws and protects the issuer from inadvertent violations.
How Crowdfunding Differs from Traditional Financing
Unlike venture capital or bank loans, crowdfunding shifts control to a large pool of small investors. While this can democratize fundraising, it also means navigating multiple compliance layers and communication requirements.
Key distinctions include:
- Lower individual investment amounts but higher disclosure obligations.
- Public visibility of funding efforts may affect brand perception.
- Potential secondary-market restrictions limiting investors’ resale of securities.
Understanding these differences helps businesses choose the funding mechanism that best supports their goals and growth timeline.
Why Legal Guidance Matters in Crowdfunding Compliance
Crowdfunding regulations are evolving as online investing expands. Startups must not only comply with SEC rules but also consider the intellectual property, tax, and corporate governance implications. A business law attorney can assist with:
- Structuring the entity and offering properly
- Drafting accurate disclosure documents
- Verifying portal registration and investor qualifications
- Managing post-offering compliance and investor relations
At Jones, Gregg, Creehan & Gerace LLP, we advise businesses, entrepreneurs, and investors in Pittsburgh and throughout Western Pennsylvania on the full scope of securities and crowdfunding compliance. Trust us to help you understand your obligations under SEC rules, mitigate risk, and structure offerings that support long-term success. Contact us today to schedule a consultation about your crowdfunding or investment law matter.