Crowdfunding has become a mainstream way for businesses to raise capital. But what many business owners don't realize is that most crowdfunding campaigns involve the sale of securities—and selling securities without proper registration or an exemption is a federal crime.
Before you launch a crowdfunding campaign, you need to understand the legal framework that governs it. The consequences of getting this wrong range from SEC enforcement actions to personal liability for every dollar raised.
Crowdfunding and Securities Law: The Threshold Question
The starting point for any crowdfunding analysis is Section 5 of the Securities Act of 1933 (15 U.S.C. § 77e). Section 5 prohibits the offer or sale of any security unless a registration statement has been filed with the SEC and is in effect. Registration is expensive, time-consuming, and impractical for most small businesses.
The critical question is whether what you're offering constitutes a "security." Under the Supreme Court's test from SEC v. W.J. Howey Co., 328 U.S. 293 (1946), an investment contract—and therefore a security—exists when there is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived from the efforts of others.
Rewards-based crowdfunding (Kickstarter, Indiegogo) typically doesn't involve securities because backers receive a product, not an investment return. But if your campaign promises equity, revenue sharing, profit participation, or any form of financial return, you are almost certainly selling securities.
And if you're selling securities, you need either registration or an exemption.
The JOBS Act and Regulation CF: Crowdfunding for Everyone
Before 2012, securities crowdfunding was essentially illegal for most small businesses. The Jumpstart Our Business Startups Act (JOBS Act), signed into law on April 5, 2012, changed that. Title III of the JOBS Act added Section 4(a)(6) to the Securities Act, creating a new exemption for crowdfunding transactions.
The SEC adopted the implementing rules—Regulation Crowdfunding, or "Reg CF"—on October 30, 2015, with the rules taking effect on May 16, 2016. The SEC significantly expanded Reg CF in November 2020, with amendments taking effect March 15, 2021.
Current Reg CF Requirements
Here is what you need to know about Reg CF as it stands today:
Offering Limits. A company may raise up to $5 million across all Reg CF offerings in any 12-month period.
Form C Filing. Every Reg CF offering requires the issuer to file Form C electronically through the SEC's EDGAR system. Form C requires disclosure of the company's business plan, financial condition, use of proceeds, target offering amount, deadline, and the terms of the securities being offered.
Financial Statement Requirements. The level of financial scrutiny scales with the amount raised:
- Up to $124,000: Financial statements certified by the company's principal executive officer
- $124,001 to $618,000: Financial statements reviewed by an independent CPA
- $618,001 to $1,235,000: CPA-reviewed or audited financial statements
- Over $1,235,000: Audited financial statements by an independent CPA
Funding Portal Requirement. All Reg CF transactions must be conducted through an SEC-registered intermediary—either a registered broker-dealer or a funding portal registered with both the SEC and FINRA. You cannot conduct a Reg CF offering on your own website.
Investor Limits. Non-accredited investors may invest up to $124,000 across all Reg CF offerings in any 12-month period, regardless of income or net worth. Accredited investors have no cap.
Ongoing Reporting. Issuers must file annual reports on Form C-AR with the SEC and post them on the company's website.
What Reg CF Doesn't Cover
Reg CF has meaningful limitations. The $5 million cap is relatively low for capital-intensive businesses. The funding portal requirement means you'll pay platform fees (typically 5–10% of capital raised, plus equity or warrants in some cases). And the disclosure requirements—particularly audited financials above $1.235 million—add real cost.
Regulation D: Private Placements for Larger Raises
For businesses seeking to raise more than $5 million—or wanting to avoid the funding portal requirement—Regulation D offers two commonly used exemptions under Rules 506(b) and 506(c).
Rule 506(b): The Traditional Private Placement
Rule 506(b) is the workhorse of private securities offerings. Under this exemption:
- No dollar limit on the amount raised
- No general solicitation or advertising permitted—you cannot publicly market the offering
- Sales to an unlimited number of accredited investors plus up to 35 non-accredited but sophisticated investors
- The issuer must have a reasonable belief that each investor qualifies as accredited
- A Form D must be filed with the SEC after the first sale of securities
The prohibition on general solicitation is the most significant constraint. You cannot post about the offering on social media, send mass emails, or advertise it publicly. Every investor must have a pre-existing substantive relationship with the company or its placement agent.
Rule 506(c): Verified Accredited Investors Only
Rule 506(c), created by the JOBS Act, permits general solicitation and advertising—but only if:
- Every purchaser is an accredited investor
- The issuer takes reasonable steps to verify each investor's accredited status
Verification historically required reviewing tax returns, bank statements, or obtaining a written confirmation from a registered broker-dealer, attorney, or CPA. However, SEC staff guidance issued in March 2025 now permits issuers to rely on minimum investment thresholds as verification—specifically, a cash commitment of at least $200,000 for individuals or $1 million for entities.
Accredited Investor Standards
An individual qualifies as an accredited investor if they have:
- Income exceeding $200,000 (or $300,000 jointly with a spouse) in each of the two most recent years, with a reasonable expectation of reaching the same level in the current year; or
- Net worth exceeding $1 million, individually or jointly with a spouse, excluding the value of the primary residence
Entities qualify with total assets exceeding $5 million, among other criteria.
Minnesota Securities Law: Blue Sky Compliance
Federal exemptions don't preempt state securities registration requirements—often called "Blue Sky" laws. Minnesota's securities laws are codified in Chapter 80A of the Minnesota Statutes (the Minnesota Securities Act).
State Registration and Exemptions
Any offer or sale of securities in Minnesota must comply with state law in addition to federal law. Minnesota requires securities registration unless an exemption applies.
For Reg CF offerings, federal law preempts state registration requirements—meaning you don't need to separately register with the Minnesota Department of Commerce. However, states retain their authority to investigate and bring enforcement actions for fraud.
For Reg D offerings under Rules 506(b) and 506(c), federal law similarly preempts state registration, but most states—including Minnesota—require a notice filing and fee.
MNvest: Minnesota's Intrastate Crowdfunding Exemption
Minnesota created its own crowdfunding exemption in 2015 through MNvest (Minn. Stat. § 80A.461). MNvest allows Minnesota businesses to raise capital from Minnesota residents without SEC registration, under these conditions:
- Offering limits: Up to $1 million with self-certified financials, or up to $2 million with CPA-reviewed financials
- Investors must be Minnesota residents
- Offerings must be conducted through a registered MNvest portal
- The offering period is limited to 12 months
- Notice filing with the Minnesota Department of Commerce is required
MNvest can be useful for local businesses with a strong community following—restaurants, breweries, local retail—but the Minnesota-residents-only limitation and relatively low caps make it impractical for businesses with broader ambitions.
Common Compliance Mistakes
In my practice representing business owners, I see several recurring problems with crowdfunding campaigns:
Treating equity crowdfunding like a Kickstarter campaign. Reward-based crowdfunding and securities crowdfunding have fundamentally different legal frameworks. Offering equity, revenue shares, or profit participation on a platform not registered with the SEC is illegal—regardless of how small the amounts.
Ignoring state securities laws. A valid federal exemption does not automatically satisfy state requirements. If you're raising from investors in multiple states, each state's notice filing and exemption requirements must be addressed.
Inadequate disclosure. Reg CF requires specific, detailed disclosures in Form C. Vague or incomplete disclosures can result in SEC enforcement action and rescission rights for investors—meaning every investor could demand their money back.
Exceeding offering limits. The $5 million Reg CF cap applies across all offerings in a 12-month period. If you run multiple offerings or switch platforms, you need to track the aggregate.
Mixing exemptions improperly. Using both Reg CF and Reg D simultaneously requires careful structuring. Integration doctrine—where the SEC treats separate offerings as a single offering—can void your exemptions entirely.
Penalties for Noncompliance
The consequences of selling unregistered securities without an exemption are severe:
- SEC enforcement actions, including cease-and-desist orders, civil penalties, and disgorgement of profits
- Rescission rights under Section 12(a)(1) of the Securities Act—every investor can demand a full refund
- State enforcement by the Minnesota Department of Commerce, including administrative penalties and injunctions
- Criminal liability under Section 24 of the Securities Act for willful violations, carrying fines up to $10,000 and up to five years in prison
- Personal liability for officers and directors who participated in the offering
Practical Steps Before Launching a Campaign
If you're considering crowdfunding to raise capital for your business, here is what I'd recommend:
1. Determine whether you're selling securities. If investors receive any form of financial return—equity, revenue share, convertible notes, SAFEs—you're selling securities. Get legal counsel before proceeding.
2. Choose the right exemption. Reg CF works for raises up to $5 million with broad investor participation. Reg D 506(b) works for larger raises from existing relationships. Reg D 506(c) works for larger raises where you want to advertise but can limit sales to verified accredited investors.
3. Budget for compliance costs. Form C preparation, legal fees, financial statement review or audit, and platform fees add up. For a Reg CF offering, expect $15,000–$50,000 in compliance costs before you raise a dollar.
4. Select a registered platform. For Reg CF, your intermediary must be registered with both the SEC and FINRA. Verify registration on the SEC's website before signing any agreement.
5. Comply with ongoing obligations. Reg CF issuers must file annual reports. Reg D issuers must file Form D. Both have ongoing anti-fraud obligations.
6. Don't forget state law. File any required state notices, pay applicable fees, and confirm your exemption covers every state where your investors reside.
Conclusion
Crowdfunding offers real opportunity for business owners to access capital outside traditional bank financing and venture capital. But it operates within a heavily regulated legal framework that demands careful compliance.
The cost of doing it right is modest compared to the cost of doing it wrong. An SEC enforcement action or mass rescission demand from investors can destroy a business far more effectively than whatever problem the capital raise was meant to solve.
If you're a Minnesota business owner considering a crowdfunding campaign, consult with a business attorney before you launch. The legal structure you put in place at the outset determines whether your capital raise builds your company—or exposes it to devastating liability.
Attorney Aaron Hall helps Minnesota business owners structure capital raises, corporate governance, and regulatory compliance. For more information, visit aaronhall.com.