Education – Overview of Reg CF
The SEC requires Castle Placement to post educational materials for prospective investors on our site. These materials are a great start to educate yourself and understand the risks of making crowdfunding investments. However, there are several additional steps you must take to make a responsible investment decision, including completion of a thorough investigation of the issuing company and participation in our online forum. The online forum allows you to ask the issuing company questions, interact with other investors, and study the benefits, detriments, and risks of each investment opportunity.
Equity crowdfunding allows the general public to participate in venture capital and private equity investing. Companies can use crowdfunding to offer and sell securities to the investing public – anyone can invest in a crowdfunding securities offering.
Pursuant to Rule 302(b) of Securities and Exchange Commission (“SEC”) Regulation Crowdfunding under the Securities Act of 1933 (Title III of the JOBS Act), as amended (the “Securities Act”), it is required that all potential investors who open an account on Castle Placement.com and/or commit to purchasing securities receive and acknowledge certain educational information from Castle Placement related to the posting of securities offerings on the Castle Placement platform, including:
(i) The process for the offer, purchase and issuance of securities through the intermediary and the risks associated with purchasing securities offered and sold in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6));
(ii) The types of securities offered and sold in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) available for purchase on the intermediary’s platform and the risks associated with each type of security, including the risk of having limited voting power as a result of dilution;
(iii) The restrictions on the resale of a security offered and sold in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6));
(iv) The types of information that an issuer is required to provide under § 227.202, the frequency of the delivery of that information and the possibility that those obligations may terminate in the future;
(v) The limitations on the amounts an investor may invest pursuant to § 227.100(a)(2);
(vi) The limitations on an investor’s right to cancel an investment commitment and the circumstances in which an investment commitment may be cancelled by the issuer;
(vii) The need for the investor to consider whether investing in a security offered and sold in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) is appropriate for that investor;
(viii) That following completion of an offering conducted through the intermediary, there may or may not be any ongoing relationship between the issuer and intermediary;
(ix) That under certain circumstances an issuer may cease to publish annual reports and, therefore, an investor may not continually have current financial information about the issuer;
(x) The risks of investing in such securities;
(xi) How securities are offered and purchased;
(xii) Investment limits for certain investors;
(xiii) The types of securities offered and any resale restrictions on such securities;
(xiv) The disclosure generally required to be made available by issuers offering securities on the Castle Placement platform; and
(xv) The relationship among Castle Placement, the companies issuing securities and investors.
Please review the important educational information below before you begin to register on Castle Placement and before you make any investment commitment.
Castle Placement, LLC: Castle Placement is a FINRA licensed investment banking platform that connects issuing companies with investors, including through equity crowdfunding.
Regulation CrowdFunding (Reg CF): an equity crowdfunding regulation that allows companies to raise capital efficiently and investors to invest capital efficiently.
- Enacted in 2016 and significantly expanded in 2021
- $5 million per year
- Light disclosure required
- Anyone (including non-accredited investors) can invest
- General solicitation/advertising permitted (subject to restrictions)
Form C: Prior to launching a Section 4(a)(6) equity crowdfunding campaign, the issuer is required to complete and submit a Form C to the SEC together with required attachments. Companies that file a Form C are required to disclose certain information to the public which can be used to understand an investment and that helps determine whether a particular investment is appropriate for a specific person. This includes general information about the issuer, its officers and directors, a description of the business, the planned use for the money raised from the offering, often called the use of proceeds, the target offering amount, the deadline for the offering, related-party transactions, risks specific to the issuer or its business, and financial information about the issuer.
Material Changes: If the issuer makes a material change to the offering terms (e.g., the total amount of the offering, the type of security, etc.) or other information disclosed to investors, including if the deadline is extended, each investor will be given five business days to reconfirm his or her investment commitment. If the investor does not reconfirm, their investment will be cancelled, and their funds will be returned. In addition, if the issuer makes a material change an amendment must be filed with the SEC.
Annual Filing Obligation of Issuers: Each issuer that successfully completes a Title III Regulation Crowdfunding securities offering is required to annually file with the SEC a Form C-AR and financial statements. This must be done no later than 120 days after the end of the Issuer’s fiscal year covered by such filing. Each Issuer must also post its Form C-AR and financial statements to its own website, and that link must be provided along with the date by which such report will be available on the issuer’s website. The Form C-AR contains updated disclosure substantially similar to that provided in the issuer’s initial Form C, including information on the issuer’s size, location, principals and employees, business, plan of operations and the risks of investment in the Issuer’s securities; however, offering-specific disclosure is not required to be disclosed in the Form C-AR. Investors should be aware that an issuer may no longer be required to continue its annual reporting obligations under certain circumstances. In the event that an issuer ceases to make annual flings, investors may no longer have current financial information about the Issuer available to them. An issuer must continue to comply with the ongoing reporting requirements until one of the following occurs:
(1) The issuer is required to file reports under section 13(a) or section 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d));
(2) The issuer has filed, since its most recent sale of securities pursuant to this part, at least one annual report pursuant to this section and has fewer than 300 holders of record;
(3) The issuer has filed, since its most recent sale of securities pursuant to this part, the annual reports required pursuant to this section for at least the three most recent years and has total assets that do not exceed $10,000,000;
(4) The issuer or another party repurchases all of the securities issued in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)), including any payment in full of debt securities or any complete redemption of redeemable securities; or
(5) The issuer liquidates or dissolves its business in accordance with state law.
Audit: An audit provides a higher level of scrutiny by the accountant than a review. The required information is filed with the SEC and posted at the start of the offering on the Castle Placement platform and available to the public throughout the offering on the Castle Placement and SEC sites. It is available to the general public on both websites throughout the offering period – which must be a minimum of 21 days.
Reviewed Financials: A review of an organization’s financial statements provides a report issued by a CPA which expresses that the financial statements are free from material misstatement. A review provides limited assurance on an organization’s financial statements. During a review, inquiries and analytical procedures present a reasonable basis for expressing limited assurance that no material modifications to the financial statements are necessary; they are in conformity with generally accepted accounting principles.
GAAP Financials: All companies raising funds under Regulation CF must provide financial statements prepared in accordance with generally accepted accounting principles (GAAP). For companies incorporated over 120 days ago, GAAP financials must include a cover page, balance sheet, income statement, statement of cash flows, statement of stockholder’s equity, and foot notes (typically 2 -5 pages including accounting methodologies used, an explanation of your taxes, a summary of any debt, and a summary of outstanding equity).
Investment Limitations: Because of the risks involved with this type of investing, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income. If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the greater of your annual income or net worth. If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $107,000 for all crowdfunding offerings in any 12-month period. Investors who qualify as accredited investors do not have an annual limit.
Calculating Net Worth: each investor in a Reg CF must calculate his or her net worth. All assets are totaled, and all liabilities are subtracted from that total. For crowdfunding, the value of the investor’s primary residence is not included in the net worth calculation. The SEC’s Investor Bulletin Crowdfunding for Investors contains detailed and useful information about how to perform these calculations.
Cancellations/Changing Your Mind: Each investor has up to 48 hours prior to a rolling close, or 48 hours prior to the offering deadline, to change his or her mind and cancel the investment commitment for any reason. However, once the offering period is within 48 hours of ending, the investment may not be cancelled for any reason, even if the commitment is made during this period. Following the close on funds, the investor will receive securities in exchange for his or her investment. If the investment commitment is not cancelled 48 hours prior to the offering deadline or a rolling close, the funds will be released to the company by the escrow agent. If the investment commitment is cancelled before the 48-hour deadline, Castle Placement will direct the return of any funds that have been committed.
Common Stock: Conveys a portion of the ownership interest in the company to the holder of the security. Stockholders are usually entitled to receive dividends when and if declared, vote on corporate matters, and receive information about the company, including financial statements. This is the riskiest type of equity security since common stock is last in line to be paid if a company fails. You should read our discussion of the risks of early-stage investing here, and pay special attention to the fact that your investment will only make money if the company’s business succeeds. Common Stock is a long-term investment.
Preferred Stock: Stock that has priority over common stock as to dividend payments and/or the distribution of the assets of the company. Preferred stock can have the characteristics of either common stock or debt securities. While preferred stock gets paid ahead of common stock, it will still only be repaid on liquidation if there is money left over after the company’s debts are paid. In certain circumstances (such as an initial public offering or a corporate takeover) the preferred stock might be convertible into common stock (the riskiest class of equity). You should review the terms of the preferred stock to know when that might happen.
Convertible Note: This form of investment is popular because it allows investors to initially lend money to the company and later receive shares if new professional investors decide to invest. The sort of convertible note that is most often offered on the Castle Placement platform may limit the circumstances in which any part of the loan is repaid, and the note may only convert when specified events (such as a preferred stock offering of a specific amount) happens in the future. You will not know how much your investment is “worth” until that time, which may never happen. You should treat this sort of convertible note as having the same risks as common stock.
SAFE: Simple Agreement for Future Equity. The SAFE investor has the right to obtain equity when the company sells shares in a future financing, using a cheap and simple contract. SAFEs solve the difficult, time consuming, and expensive problem of valuing an early-stage startup, and documenting a priced equity investment. A SAFE is not a loan, does not have a legal obligation to be repaid, does not accrue interest, and does not have a maturity date.
Side by Side: A Side by Side offering refers to a deal that is raising capital under two offering types. For instance, a Side by Side offering may involve a raise under Regulation CF and Rule 506(c) of Regulation D.
Valuation Caps: The valuation caps reward early convertible note or SAFE investors. It sets the maximum price that your convertible security will convert into equity. To translate that into a share price, you divide the valuation cap by the series A valuation. Based on the valuation cap investors will be entitled to equity priced at the lower of the valuation cap or the pre-money valuation in the subsequent transaction.
Debt/Revenue Share: Securities in which the seller must repay the investor’s original investment amount at maturity plus interest. Debt securities are essentially loans to the company and the major risk they bear is that the company does not repay them, in which case they are likely to become worthless.
Post-Money Valuation: The valuation of the company after a new investment. Calculated by adding the pre-money valuation and the amount of the new investment.
Pre-Money Valuation: The valuation of the company prior to a new investment. This does not include the amount of the new investment. The marketplace (supply and demand) determines the pre-money valuation of a private company.
Valuation: What the company is considered to be worth by the marketplace. Based on the valuation, percentage ownership can be calculated. The price per share of the stock, by itself, does not provide any meaningful information.
Restrictions on Resale: The securities offered on Castle Placement are only suitable for potential investors who are familiar with and willing to accept the high risks associated with high risk and illiquid private investments. Securities sold through Castle Placement are restricted and not publicly traded and, therefore, cannot be sold unless registered with the SEC or an exemption from registration is available. You are generally restricted from reselling your shares for a one year period after they were issued, unless the shares are transferred:
- to an accredited investor;
- to the company that issued the securities;
- as part of an offering registered with SEC;
- to a family member (defined as a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships);
- in connection with the investor’s death, divorce or similar circumstance;
- to a trust controlled by the investor, or a trust created for the benefit of a family member.
- Promoters must clearly disclose in all communications on the platform the receipt of compensation and the fact that he or she is engaging in promotional activities on behalf of the issuer.
- Disclosure regarding manner in which Castle Placement is compensated: Castle Placement receives a cash fee equal to a percentage of the capital that is raised by the company in this Reg CF and stock in the company equal to a percentage of the capital that is raised by the company in this Reg CF.
- You must understand that the entire amount of your investment may be lost. Investing in securities involves risk, and you should not invest any funds unless you can afford to lose the entire amount of your investment.
- There are restrictions on your ability to cancel an investment commitment and obtain a return of your investment. You will have up to 48 hours prior to the end of the offering period to change your mind and cancel your investment commitment for any reason. Once the offering period is within 48 hours of ending, you will not be able to cancel for any reason, even if you make a commitment during this period.
- It may be difficult for you to resell the securities that you have acquired.
Castle Placement does just about all the work for your Reg CF:
- You can focus on growing your business
- Provide templates for your contract with investors (although Castle Placement does not provide legal advice; you need to consult with your legal counsel)
- Help you set up an SPV to aggregate all investors into one entity on your cap table
- Help you complete and submit your Form C
- Provide you with escrow and transfer agents, introduce you to legal/compliance and accountants, and help facilitate contract signings, payments transfers, escrow, reminders, filings, and many, many more details – including having the funds wired to your corporate account
- Help you create one or more SPVs in which a large number of investors can invest, instead of investing directly in the company
Benefits of a Reg CF for the issuer:
- Quickly raise a significant amount of capital in an attractive structure
- Makes venture capital investing available to everyone – not just high-net worth individuals and institutions
- Like-minded people, clients, customers and friends can invest in your company
- Anyone can invest as little as $100 in your company (in denominations as little at $100)
- General solicitation: broadly advertise via email, digital advertising, in the press, or on social media – subject to regulatory compliance
- Entire raise can be consolidated into one or more SPVs (investors get the same economic exposure and information rights as they would from a direct investment in the company)
- You could have a massive crowd of rabid fans with a strong economic incentive to support you
Reg CF Requirements:
- All Reg CF offerings must be made through a FINRA licensed broker/dealer like Castle Placement or a funding portal
- Form C (a relatively simple information/disclosure document) must be filed with the SEC along with other items including past fundraising rounds, number of employees, large stakeholders, officers & directors, use of funds, material risks, etc.
- Any statements made to the public (including on LinkedIn, Twitter, Facebook, etc.) before Form C is filed must include required disclosures, and a screenshot of each of statement must be filed with Form C
- Advertisements must direct potential investors to the Castle Placement landing page for the offering, be factual, complete, and avoid “forward looking information”, projections, hyperbole, misleading information, or omission of important information
- Advertisements cannot include the terms of the offering (use of funds, amount of securities offered, price and nature/type of the securities, closing date, status towards fundraising goal, etc.)
- The SEC requires periodic fundraising progress updates on Form C-U and any amendments to the offering statement on Form C/A
- Company financials must include revenues, cost of goods, taxes paid, net income, assets, cash, accounts receivable, short-term debt and long term debt
- Investment limits are calculated from self-reported income and net worth, and previous amounts invested across all Regulation CF offerings
- Two years of GAAP financials – must be reviewed by an independent CPA (audited financials are required for raises above $1.07 million). If the company was incorporated over six months ago and is raising over $1.07 million two years of GAAP format financials and an Independent Auditor’s Report are required. Castle Placement can introduce you to CPAs and legal/regulatory firms that are well-versed in Reg CF offerings, perform efficiently and quickly, and charge reasonable fees – or you may choose your own professionals
- Company must wait 21 days after Form C is filed to withdraw funds
- One year after closing, the company must file an annual report to update investors (includes a business discussion and CEO self-certified financial statements – no review or audit is required)
- Frequently Asked Questions What is the Investment Process on Castle Placement?
How much can an individual invest in a Reg CF transaction?
Anyone can invest in offerings under Regulation Crowdfunding. Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income. Accredited investors have no limit on how much they can invest.
Do investors pay fees?
Castle Placement receives fees based on a percentage of each investment made by each investor on the platform. The fee schedule is subject to change at any time and is disclosed in the offering document of the company.
How Does Castle Placement Get Paid?
Castle Placement makes money by charging a commission on the amount of investments raised by the issuer. This is subject to change at any time and is disclosed in the offering document of the company. The commission is usually a percentage of the capital raised, and usually is comprised of a cash fee and an equity fee.
Can Regulation Crowdfunding Securities be Purchased Directly from a Company?
No. Companies may not offer crowdfunding investments to directly. They must use a crowdfunding intermediary, such as a Financial Industry Regulatory Authority (FINRA) broker-dealer like Castle Placement or a funding portal. Each must be registered with the Securities Exchange Commission and FINRA.
What Proof of Ownership does the Investor receive?
The offering is “Book Entry” – this will operate as the proof of purchase. Electronic records will be held with the issuing company’s transfer agent or cap table management service. Once the purchase of stock is complete, the investor will receive a confirmation email with details of the investment which will include a Subscription Agreement countersigned by the issuing company.
What If the Target Investment Goals are Reached by the Issuing Company Early?
When the target offering amount has been met Castle Placement will notify investors by email. If the issuing company obtains its goal early, it can create a new target deadline at least five business days out. Investors will be notified of the new target deadline via email. Investor will then have the opportunity to cancel up to 48 hours before the new deadline. Regardless of their progress in meeting their funding target, campaigns must be live for a minimum of 21 days.
What Ways Can I Invest?
On the Castle Placement platform you can invest: i) individually; ii) from a self-directed IRA or 401K; iii) as a Trust, or iv) as an entity (such as an LLC or corporation).
If you or someone you know wants information about raising capital for a company, feel free to continue exploring our help section or reach out to a Castle Placement team member at email@example.com.
To learn more about crowdfunding, see the adopting release and complete text of Regulation Crowdfunding.
To read the May 10, 2017 SEC Investor Bulletin Crowdfunding for Investors, Click Here.
For additional investor educational information, see the SEC’s website for individual investors by clicking here.