THE AFFILIATE TRAP IN EQUITY CROWDFUNDING

Equity crowdfunding under Regulation CF  presents a twist which can be a trap for the unwary. The $1 million limit on the maximum offering amount per 12 month period includes securities sold by an “affiliate.” The “affiliate” limitation has not been historically present in other integration provisions in the Securities Act, such as Regulation D.

The term affiliate can be basically understood to mean an entity under common control with the issuer.  For example, two companies which shared a president, or even a director, or were in a parent-subsidiary relationship, would be affiliates and they would be required to aggregate for purposes of Regulation CF.

For example, those two companies could each hold Regulation D offerings which would not be integrated with each other as far as the dollar amount raised or number of purchasers in the offering. Those two companies, however, would have to integrate their Regulation CF offerings. However, an issue is not required to aggregate non-crowdfunding offerings into its crowdfunding offering. Therefore, an issuer could carry out a crowdfunding offering,  a Regulation D offering, a regulation a offering, and an intrastate offering, all without integrating any of them into the Regulation CF offering (although one of the other offerings may be integrated with each other).