When it Comes to Investment Crowdfunding, Compliance Matters

What to know before you take the plunge

The investment crowdfunding marketplace is growing faster than ever before, projected to grow by $196.36 billion from 2021 to 2025.

And while its growth and popularity show no signs of slowing down, crowdfunding still leaves regulators and some investors feeling a little on edge.

As a relatively new market, the lack of compliance by companies and platforms has aimed a spotlight towards the legal and regulatory obligations required to govern this new way of raising capital.

This lack of compliance coupled with the high risk for failure and lack of liquidity could deter potential investors from jumping in.


So if you’re considering dipping your toes into the crowdfunding world, here’s why compliance should be at the top of your list.

The state of compliance in investment crowdfunding

Let’s go back to the very beginning of —2012.

The Jumpstart Our Business Startups Act (JOBS Act) gave the American people a chance to invest in offerings by an unlimited array of small businesses and startups, known as “Regulation Crowdfunding.” No one really knew what to expect. It had been over 80 years since regular people were invited to participate in wealth building by investing in private enterprise.

Fast-forward to 2016. The SEC introduced Regulation Crowdfunding to the investing and startup world. This new regulation made it possible for small businesses and startups to raise capital from friends, family, and social and business networks. In addition, it opened the playing field to allow non-accredited investors to participate in this form of wealth building.

While 2016 brought in some rules to live by, the question of compliance was also raised. How would these requirements play out in the real world?

Investment crowdfunding still represents the biggest potential for shifting capital from Wall Street to Main Street. The first five years of Regulation Crowdfunding has highlighted the need for an expanded capital raising marketplace and some new rules have expanded the promise of widespread local economic development.

As of March 2021, the rules were updated to include the following:

  • permit a company to raise a maximum aggregate amount of $5 million through investment crowdfunding offerings in a 12-month period
  • increase the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period and,
  • remove the investment limits on accredited investors

Crowdfunding compliance – what to watch for 

1.   Navigating regulatory filing requirements can be a deterrent to compliance

The SEC requires a Form C (also known as the offering statement) and is required from any company conducting regulation crowdfunding on an approved platform like Crowdfund Mainstreet.

That, unfortunately, is the easiest part.

The form itself takes about 60+ hours to properly complete. A filed Form C is the form investors will review before deciding to invest and will include information like the terms of the offering, the nature of the business, and analysis of the company’s plans for future growth. Also included are the requisite financial disclosures.

Without this documentation, investors would essentially be going in blind.

2.   Lack of legal experience in the regulation crowdfunding space

Companies are encouraged to consult business and securities attorneys when venturing into the crowdfunding space. Unfortunately, because it’s a relatively new field, the right people with the type of experience required to navigate this are few and far between.

Companies looking to raise capital should make sure their attorneys can help them create a clear plan that outlines what they can offer investors and a strategic plan of action to lead to success.

While investment crowdfunding can offer paths to securing investments quickly on various platforms, it would be a disservice to investors and companies if there isn’t strong due diligence to structure what happens next.

3.   A long history of non-compliance

While the SEC has disclosure requirements for companies trying to raise capital, the compliance to this requirement (in terms of financial statements) is only at 56%, which isn’t a great number.

There’s a long history of non-compliance when it comes to these financial disclosure filings. This, coupled with incomplete financial statements, unfiled annual reports, and inaccurate final raise amounts, introduces a level of uncertainty that comes with this type of investment, especially if you’re dealing with platforms who are not part of the 56%.

What to expect from a regulation crowdfunding platform

With compliance top of mind, it’s essential to seriously examine the level of compliance and transparency your platform of choice is practicing. While compliance errors can happen (yes, even we’ve had a few), especially in this relatively unknown world — there should be a concerted effort to comply with regulatory obligations.

At a minimum, here are a few helpful questions any investor should ask before choosing a crowdfunding platform:

  1. What efforts are they taking to meet the regulatory requirements?
  1. What type of education do they provide to ensure companies and their investors understand the terms of the offering and the obligations that go with it?
  1. Do they allow companies to use off-the-shelf instruments (they likely do not understand) and incomplete financial data in their offerings?

Compliance isn’t optional — it’s a must

As investment crowdfunding continues to grow, so do the concerns surrounding regulation and compliance. Here at Crowdfund Mainstreet, we take compliance seriously and go above and beyond to make sure clients are playing by the rules.

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