Jennifer J. Schulp and Christian Kruse
If the American economy were running a 100m dash, small business would be the starting blocks, providing the foundation for success. Making up 89.8 percent of all US companies and contributing 20.6 percent to American job creation since 1992, small businesses—those under 20 employees—are launchpads for growth.
However, small businesses can have a hard time accessing the capital markets and investors. To that end, Cato’s Center for Monetary and Financial Alternatives hosted a policy forum last month to discuss obstacles small businesses face in raising capital and propose solutions for those challenges.
One panel discussion focused on the smallest businesses, where the race begins. Each of the panelists highlighted investment crowdfunding as a promising capital-raising tool.
Crowdfunding and Regulation CF
Crowdfunding was created by the JOBS Act of 2012 and implemented by the Securities and Exchange Commission (SEC) under rules promulgated in 2016 (and updated in 2020). It allows entrepreneurs to raise small amounts of money from many investors online. Crowdfunding is meant to be a lower-cost alternative to traditional capital raising and gives average Americans a chance to invest in small businesses.
Normally, a company must register its issuance of securities with the SEC to sell its shares publicly. However, several exemptions permit businesses to sell securities without registration. These exemptions are generally less costly but often limit who can invest or how much can be raised.
Crowdfunding, implemented through Regulation CF, is the newest exemption. It was created to address some of the issues with existing exemptions, like Regulation D, which limits businesses to “accredited” investors. For an investor to be accredited, he or she must generally earn at least $200,000 per year or have a net worth of over $1 million. Only about 18.5 percent of American households qualify as accredited investors, limiting the pool of people who can support fledgling businesses. Entrepreneurs are often further limited when their networks are less well-to-do, as may happen for business owners in rural areas or from less wealthy communities. One of the event’s panelists, Gerry Hayes of Indiana University’s Kelley School of Business, described the accredited investor standard as having “detrimental effects on the United States economy and in particular the entrepreneurial and innovation economy.”
Crowdfunding has made strides in connecting investors and businesses. During the panel discussion, Amy Reischauer, from the SEC’s Office of the Advocate for Small Business Capital Formation, pointed to recent SEC data that shows the growing use of Regulation CF and that crowdfunding offerings have taken place in almost every state. Crowdfunding has also provided pathways for small businesses that have traditionally struggled with startup fundraising. According to data from the Small Business & Entrepreneurship Council, whose CEO Karen Kerrigan spoke on the panel, women- and minority-owned businesses have accounted for 36 percent of all Regulation CF offerings—far outpacing their 5 percent share of traditional startup deals.
These successes show that crowdfunding is onto something by widening the pool of potential investors and lowering the costs to raise capital. Further reforms could build on these successes by making crowdfunding more fair for investors and streamlining the process for entrepreneurs.
Restrictions for All but the Rich
While crowdfunding is open to everyone—not just accredited investors—it does limit the amount that someone can invest. The JOBS Act originally capped annual crowdfunding investments at 10 percent of income for those earning over $100,000, and the greater of $2,500 or 5 percent of income for those below $100,000. (This threshold currently stands at $124,000.)
A revision to Regulation CF in 2020 nevertheless inserted the insidious accredited investor definition on top of the income-limited investment framework, allowing investors who qualify as accredited to invest as much of their income as they’d like.
The accredited investor definition should have no place in crowdfunding. The definition is borrowed from Regulation D, where it serves as a proxy—and a poor one at that—for determining whether an investor is sophisticated enough to participate in private offerings that make no mandatory disclosures. In contrast, crowdfunding offerings provide mandatory public disclosure. Thus, crowdfunding investors are not expected to fully fend for themselves. Applying the accredited investor standard here makes little sense.
Moreover, investment limitations—in any form—are themselves paternalistic. Crowdfunding’s income-limited investment framework presumes that the government knows who can and cannot afford to take risks. These types of limitations are particularly unwarranted here because crowdfunding already incorporates additional measures aimed at combating fraud, including mandating disclosure and imposing liability for the funding portals that serve as intermediaries for crowdfunding offerings. And, more to the point, Regulation CF hasn’t proven itself to be particularly fraud-prone, with only one enforcement action for securities fraud since its inception.
Because funding portal liability and limited disclosures provide investors with protection from fraud, Congress and the SEC should allow individuals to invest as they see fit by eliminating any investment restrictions.
Disclosures and Funding Cliffs
Crowdfunding requires limited disclosure that increases with the size of the offering. As companies raise more money, they must increase the level of financial disclosure by securing more expensive accounting scrutiny. For offerings under $124,000, financial statements must be signed by the company’s principal executive officer, whereas offerings between $124,000 and $618,000 must be reviewed by an independent public accountant. First-time issuers may continue to use reviewed statements up to $1.235 million, whereafter they must produce audited financial statements. Returning issuers must produce audited financial statements above $618,000.
It’s no surprise, then, that offering sizes cluster around these cutoff points. According to a 2025 SEC report, only about 6 percent of offerings set their maximum target at $5 million. Instead, 22 percent of offerings set their max target at roughly $1.2 million, and another 29 percent right below $124,000.
These artificial “funding cliffs,” created by Regulation CF’s thresholds, push issuers to halt fundraising rather than raise costs by triggering the next level of financial disclosure. The jump in cost is significant: going from a CEO signature to an outside review increases compliance costs by 2–9×, and audits cost roughly double a review. And while conducting a Regulation CF offering is much less involved than a registered offering, it is still a sizable undertaking for business owners. Small business owners typically lose 9%-13.5% (2%-3.5% regulatory and 7%-10% commission) of their offering proceeds to costs of raising capital.
These costs are too high, and they’re illogical. Arbitrary regulatory thresholds shouldn’t dictate a business’s funding strategy. Barriers that force businesses to instead fundraise around regulatory compliance don’t give investors the full picture regarding a business’s funding goals and could end up hurting a company’s growth. And, at the end of the day, much of startup investing centers around investor interest in a company’s “story,” not the quality of their financial statements.
Since there has been only one case of fraud at any level of disclosure, maintaining heightened disclosure in Regulation CF is overkill. Restricting accounting scrutiny to placing liability upon the CEO for any inconsistencies provides disincentives for fraud. As such, Congress and the SEC should pare down Regulation CF’s financial disclosures.
Crossing the Finish Line
By cutting the costs of connecting businesses and investors, crowdfunding helps small businesses go from the starting blocks to the finish line. But disclosure thresholds and investment limitations suppress growth and limit opportunities for burgeoning businesses.
These aren’t hard problems to fix. With simple, sensible reforms—removing income-based limits and unnecessary financial disclosures—Regulation CF can do even more to connect investors and entrepreneurs and help small businesses get off on the right foot.
