Are Reg CF Securities Restricted?

Regulation Crowdfunding (Reg CF) has opened up new opportunities for startups and small businesses to raise capital from a broader pool of investors, including non-accredited individuals. However, one important consideration for investors is the nature of the securities they acquire through Reg CF offerings and whether they are subject to any restrictions.

The short answer is yes, Reg CF securities are generally considered restricted securities, meaning they are subject to certain limitations on their transferability and resale.

What are Restricted Securities?

Restricted securities are securities that are acquired in an unregistered, private sale from the issuing company or an affiliate. These securities are not freely tradable on public markets, such as stock exchanges, and are subject to restrictions on their resale or transfer.

The restrictions on restricted securities are designed to ensure compliance with federal securities laws and to protect investors by preventing the uncontrolled distribution of unregistered securities.

Reg CF Securities and Resale Restrictions

Securities issued through Reg CF offerings are considered restricted securities because they are not registered with the Securities and Exchange Commission (SEC) and are not traded on public markets. As a result, these securities are subject to certain resale restrictions.Specifically, Reg CF securities cannot be resold or transferred for a period of one year after the date of purchase, except in certain limited circumstances.

These exceptions include:

1. Transfers to the issuer of the securities (the company that issued them)

2. Transfers to an accredited investor

3. Transfers as part of a registered offering

4. Transfers to family members or trusts

5. Transfers in connection with certain events, such as death or divorce

After the one-year holding period, Reg CF securities may be resold or transferred, but they remain restricted securities, and any subsequent resales or transfers must comply with applicable securities laws and regulations.

Implications for Investors

The restricted nature of Reg CF securities has several implications for investors:

1. Liquidity Constraints: Investors should be prepared to hold their Reg CF securities for an extended period, potentially indefinitely, as there may be limited opportunities for resale or transfer.

2. Potential for Illiquidity Discounts: The lack of liquidity and transferability of Reg CF securities may result in these securities being valued at a discount compared to similar, freely tradable securities.

3. Due Diligence Importance: Given the illiquid nature of Reg CF securities, it is crucial for investors to conduct thorough due diligence on the issuing company and its prospects before investing, as they may be unable to easily exit their investment.

4. Diversification Considerations: Investors should consider diversifying their investments across multiple Reg CF offerings or other asset classes to mitigate the risks associated with the illiquidity of these securities.

While the restricted nature of Reg CF securities may be seen as a drawback, it is important to remember that these restrictions are designed to protect investors and ensure compliance with securities laws. By understanding the implications of restricted securities, investors can make informed decisions and manage their expectations accordingly when participating in Reg CF offerings.