Cents and Sensibility: Understanding Legal Issues in Equity Crowdfunding

It’s an approach that has transformed early-stage investing: crowdfunding. Small amounts of money can make a big difference for a business getting started or growing. In fact, a little from a lot of people can go a long way.

Crowdfunding generally refers to the process of raising large amounts of capital to finance a project or business venture through small-dollar contributions from a large number of people, typically over the internet on social media.^[1]

Crowdfunding through online platforms such as Kickstarter, GoFundMe, and Indiegogo is a way to reach a broader audience and bypass traditional funding channels.^[2] Initially, these websites only provided a product or a discount to an investor, on a donation or reward basis. Today, however, crowdfunding can also be used to offer and sell securities.

Traditionally, when raising capital, companies would seek options such as obtaining a small business loan, a grant, or venture capital funding. While these options remain available, crowdfunding is an opportunity to reach a broader potential investor base.

Crowdfunding Securities Act Registration Exemption

According to the U.S. Securities and Exchange Commission, Regulation Crowdfunding (“Regulation CF”) allows for eligible companies to use crowdfunding to sell securities. The Jumpstart Our Business Startups Act (“JOBS Act”)^[3] established a new crowdfunding exemption from registration under Securities Act § 4(a)(6).^[4] On October 30, 2015, the Securities and Exchange Commission issued its final rules to implement the crowdfunding exemption. Those rules became effective on May 16, 2016.

The crowdfunding exemption authorizes companies to offer and sell, through qualified intermediaries, limited amounts of equity securities to members of the general public who do not qualify as “accredited investors.” One requirement is crowdfunding through an intermediary, as discussed in the next section. As summarized on the Securities and Exchange Commission’s website, the other requirements are as follows:

• [The rules] permit a company to raise a maximum aggregate amount of $5 million through crowdfunding offerings in a 12-month period
• limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period and
• require disclosure of information in filings with the Commission and to investors and the intermediary facilitating the offering^[5]

Crowdfunding Through an Intermediary

If a company makes an offering for crowdfunding, it must be through an online platform. A company will only be able to engage in a crowdfunding offering through a registered broker‑dealer or a funding portal acting as an intermediary, and a company can only use one intermediary for a particular offering or concurrent offerings made in reliance on the exemption.^[6] The offering must be conducted online only through the intermediary’s platform, so that the “crowd” has access to information and there is a forum for an exchange of information among potential offering participants.^[7]

California’s Crowdfunding Exemption

Companies considering crowdfunding must also consider state securities laws. For example, effective as of January 1, 2022, California offers a crowdfunding exemption under Corporations Code section 25102(r). The law enables issuers to raise up to $300,000 on a funding portal through an offering conforming with federal Regulation CF^[8] without a financial statement review.

There are numerous requirements for an issuer to receive a crowdfunding exemption in California, which are as follows:

1. The issuer must be a California corporation or a foreign corporation subject to Corporations Code section 2115;
2. the offering must follow the requirements of Subpart B of federal Regulation CF (except that the aggregate amount of securities sold by the issuer during the twelve‑month period preceding the date of offering, including the securities offered in that transaction, must not exceed $300,000);
3. the issuer need only include accounting statements certified by management rather than a review by an independent public accountant;
4. the issuer must take reasonable steps to ensure that each purchaser who is a natural person and not an accredited investor is able to evaluate the merits and risks of the prospective investment;
5. the issuer must give the purchaser a three‑day right to rescind any investment;
6. the issuer must not, itself or through any third party not licensed as a broker‑dealer, conduct any direct solicitation of the securities; and
7. the issuer must not require any investor to waive jury trials, be bound by law other than California, or file or resolve a claim or dispute in a forum other than California.^[9]

Thus, while regulated, crowdfunding does have statutory exceptions that take its features into account and provide a way for eligible businesses to take advantage of an additional funding source.

A version of this article previously appeared on the website for CEB’s legal news service. © The Regents of the University of California, 2025. Reprinted with permission. Click here to learn more about CEB’s legal research and CLE products, and its commitment to serving the California legal community.

1. Financing and Protecting California Businesses (Cal. CEB 2025) § 1.27. ↑

2. The author, CEB, and the ABA Business Law Section do not endorse any of these platforms. ↑

3. Pub. L. No. 112-106, 126 Stat. 306 (codified as amended in scattered sections of 15 U.S.C.). ↑

4. 15 U.S.C. § 77d(a)(6). ↑

5. Regulation Crowdfunding, U.S. Sec. & Exch. Comm’n (last updated Apr. 24, 2025). See also 17 C.F.R. § 227.100, .201–.203 (2025). ↑

6. 17 C.F.R. § 227.100(a)(3), .300(a)(1) (2025). ↑

7. Financing and Protecting California Businesses (Cal. CEB 2025) § 6B.3. ↑

8. Specifically, in accordance with 17 C.F.R. § 227.100–.206. ↑

9. Financing and Protecting California Businesses (Cal. CEB 2025) § 6B.37A. ↑