Feb 21, 2024

Mid-Stream Maneuvers: Why You Can’t Add a Crowdfunding Vehicle to Your Ongoing Reg. CF Offering

Financing By Patrick Costello
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Due to somewhat recent amendments to Regulation A and Regulation D and the creation of Regulation Crowdfunding, private companies can now raise tens of millions of dollars without conducting a traditional initial public offering. However, the de-restriction and opening of the private capital markets place increased importance on business planning around the registration requirement thresholds under Section 12(g) of the Securities Exchange Act of 1934.

This is especially true where certain exemptions from the Securities Act allow securities offerings to an unlimited number of retail investors. Fortunately, companies engaging in the private capital markets have access to several tools to reduce their likelihood of needing to register their securities under Section 12(g).

What Are Crowdfunding Vehicles?

Under Regulation Crowdfunding (“Reg. CF”), one such tool is a crowdfunding vehicle. Proper use of this tool, in accordance with Rule 3a-9 of the Investment Company Act of 1940 (“Rule 3a-9”), allows an issuer to aggregate Reg. CF investors into a single entity in a crowdfunding offering in which the crowdfunding vehicle and operating company file as co-issuers on Form C (a “Co-Issuer Offering”). This entity counts as one holder of record when calculating the number of holders of a company’s securities for Section 12(g) purposes. In relation to Rule 3a-9, I was recently asked to determine whether a crowdfunding issuer, after several closings, could amend their offering statement to include a crowdfunding vehicle for the purpose of delaying the application of Section 12(g).

Can You Amend the Offering Statement?

After researching the matter, I determined that Reg. CF and Rule 3a-9 do not permit such an action for the following reasons.

First, adding a crowdfunding vehicle via an amendment to an ongoing Reg. CF offering is not feasible while maintaining compliance with Rule 3a-9. This rule dictates that a crowdfunding vehicle can only issue its securities under Reg. CF in offerings where the crowdfunding vehicle and the issuer are co-issuers. Three major obstacles prevent compliance under these circumstances:

  1. A crowdfunding vehicle cannot be deemed a co-issuer of an ongoing Reg. CF offering that since such offering did not involve the sale of co-issuer securities from the very start thereof.
  2. Since the issuer has already closed on investor funds and issued securities, it would need to compel all those shareholders to exchange their shares for the securities of the crowdfunding issuer. In circumstances where the company can force investors to agree to such a transaction, it would involve issuing the crowdfunding vehicle securities in an offering and sale which is not governed by Reg. CF. As explained, this would violate Rule 3a-9 and be a prohibited action for a crowdfunding vehicle.

    Furthermore, given that there may be multiple investors in the Reg. CF offering, many of whom are not accredited investors, no exemption may be available for the exchange issuance resulting in the need to file a registration statement on Form S-4, which is timely and cost prohibitive.

  3. Crowdfunding vehicles are generally organized as LLCs, with operating agreements that explicitly recite the requirements of Rule 3a-9. As such, a violation of Rule 3a-9 under the prior circumstances would most likely be prohibited under the crowdfunding vehicles governing documents.

Second, in the situation prompting this question, the company was attempting to use this mid-offering amendment to utilize the exemption from Section 12(g) under Exchange Act Rule 12g5-1(a)(8), which states that securities held by a crowdfunding vehicle constitute one holder of record if they were purchased using funds obtained from natural persons.

Issuers that qualify for this exemption can obtain investments from an unlimited amount of natural persons and have them count as one holder of record for purposes of Section 12(g). However, issuers who have already closed on investor funds and issued securities in their Reg. CF Offering cannot qualify for this exemption regarding those securities.

This conclusion draws from the text of Rule 12g5-1(a)(8), which allows a crowdfunding vehicle and issuer to exclude securities issued by a crowdfunding vehicle in a Regulation Crowdfunding offering where the vehicle and the issuer are deemed co-issuers under the Securities Act. In this case, the securities that Reg. CF investors would receive in exchange for the crowdfunding issuer’s securities, a necessary transaction for a mid-offering amendment to add a crowdfunding vehicle, would not count as securities issued in a crowdfunding offering. Therefore, they would not qualify for the Rule 12g5-1(a)(8) exemption. To even get to this point in the analysis assumes that the SEC would not object to the mid-offering amendment to add a crowdfunding vehicle, which appears unlikely.

Get Answers to Avoid Anti-Fraud Provisions

Issuers should also understand that once Section 12(g)’s registration requirements apply, no options exist to extinguish them. Any attempt by an issuer to evade Section 12(g)’s registration requirements likely constitutes a deceptive scheme to avoid federal securities law requirements, potentially triggering a violation of the securities anti-fraud provisions. As such, it is important for issuers to engage in business planning with regard to Section 12(g) and Rule 3a-9 early on, especially if they intend to offer securities in the private capital markets.

If you are interested in learning more about business planning, regulation crowdfunding, or other methods of capital funding, please contact Patrick G. Costello at or (202) 869-0888 (ext. 130). You can also reach us at our general information email at