How Regulation Crowdfunding Caps Film Raises at $5 Million and Sets Buyer Income Limits

Regulation Crowdfunding lets companies sell securities to the public in small amounts through online platforms. One film project, Sound of Freedom, has used it to offer buyers revenue participation rights. The federal rules set a yearly cap for issuers, limits for many individual buyers, and a filing that every offering must make.

Regulation Crowdfunding is a registration exemption under the Securities Act, and each offering carries federal disclosure requirements and investor limits. The sections below cover how the rule took effect, what it caps, how buyer limits are set, and how one film offering was structured, along with the points where reported figures differ.

How the Rule Took Effect and Who Runs Each Offering

The SEC adopted the rule in 2015. Eligible companies could begin raising capital under it on May 16, 2016. An issuer may offer or sell securities in reliance on Section 4(a)(6) of the Securities Act.

Each offering must be conducted exclusively through one online platform. That platform must be a broker-dealer or funding portal registered with both the SEC and FINRA. The Sound of Freedom offering ran all of its sales through a single portal, Angel Funding, which the Farrell Fritz analysis describes as a sister company of Angel Studios.

The issuer files its offering statement on Form C through the SEC’s EDGAR system. The Form C cover page is generated from XML-based text boxes. Required disclosure that those boxes do not request must be filed as attachments, and no specific presentation format is required for the attachments.

The offering statement covers officers, directors and owners of 20% or more of the issuer; the business and how proceeds will be used; the offering price or how it is set; the target amount and deadline; whether investments above target are accepted; related-party transactions; and financial condition and financial statements. The financial statement requirements depend on how much the issuer sold under the rule in the prior 12 months.

The Cap Before and After 2021
Hinshaw reports the SEC raised the Regulation Crowdfunding limit on an issuer’s sales in 12 months from $1.07 million to $5 million, with the amendments taking effect in early January 2021.

A $5 Million Ceiling on Sales in 12 Months

The rule text at 17 CFR 227.100 says an issuer’s total sales under the exemption in the 12 months before an offer or sale cannot exceed $5,000,000. The offering being made counts toward that total.

The cap was lower before 2021. The SEC’s compliance guide gives the maximum as $1,070,000 in a 12-month period. Hinshaw, a law firm, reports that the SEC raised the limit from $1.07 million to $5 million. The SEC adopted the change on Nov. 2, 2020, and Hinshaw says the amendments took effect in early January 2021.

The same change removed purchase limits for accredited investors. Hinshaw says those buyers can purchase any amount of securities in a crowdfunding offering and are not subject to the 12-month rule that applies to other buyers.

Hinshaw lists other changes adopted in the same action. The Regulation A Tier 2 maximum offering rose from $50 million to $75 million, and the Rule 504 limit under Regulation D rose from $5 million to $10 million over 12 months. Temporary financial statement relief for offerings of $250,000 or less was extended to Aug. 28, 2022. Offerings separated by more than 30 calendar days generally will not be integrated, subject to conditions.

Income and Net Worth Limits for Non-Accredited Buyers

Investors who are not accredited face a separate limit under the same rule. If either their income or their net worth is under $124,000, the cap is the greater of $2,500 or 5% of the greater of the two figures, according to the rule text as published by Cornell’s Legal Information Institute.

If both income and net worth are at least $124,000, the cap is 10% of the greater of the two figures, not to exceed $124,000 in sales.

The limit covers purchases across all issuers under Section 4(a)(6) in the 12 months before the transaction, including the current one. A purchase in another crowdfunding offering therefore counts against it.

The rule text also sets three instructions. A natural person’s income and net worth are calculated as they are for accredited-investor status under Rule 501. Spouses may calculate both jointly, but their combined investment cannot exceed the limit for a single investor at that level. An issuer may rely on the intermediary’s efforts to enforce the limits, provided the issuer does not know that the investor has exceeded them or would exceed them.

Hinshaw and the SEC’s compliance guide use $107,000 and $2,200 for these tests, while the Cornell text uses $124,000 and $2,500. The figures are covered in the final section below.

Investors don’t become equityholders in the issuer. Nor do they become creditors in the traditional sense.

How One Film Offering Structured Its Returns

A Farrell Fritz analysis dated July 7, 2023, and published through Legal 500, describes how Angel Studios funded prints and advertising for the film Sound of Freedom through a Regulation CF offering. According to the analysis, the company issued revenue participation rights rather than stock, convertible notes or SAFEs.

Investors receive these rights under an agreement each one signs. The analysis says the rights are not common equity, carry no distribution or voting rights, and are not secured by the studio’s assets. Investors are neither equityholders nor traditional creditors, since there is no promise by the issuer to repay the investors except to the extent the issuer generates gross revenues.

Under the structure, investors receive the film’s gross theatrical receipts first, up to a 120% return on the amount invested. If receipts do not exceed the amount invested plus 20%, investors receive 100% of gross receipts, pro rata. Gross receipts cover only theatrical revenue from this film, and other sources, such as streaming, are excluded.

The analysis says investors do not share in returns above the 20% premium. It also says payouts depend on one project’s theatrical revenue rather than the studio’s overall revenue. It presents prints-and-advertising funding as less risky because investors back a finished film they can evaluate.

The analysis lists benefits for issuers, including no valuation negotiations, no equity participation and no pressure to produce an exit event. It says the model suits issuers whose revenues are reasonably predictable and sufficient. According to the analysis, Angel selects films through a process in which filmmakers pitch projects to a community of platform users.

The analysis says Angel raised the full $5 million from roughly 7,000 investors. It presents this raise as an exception, noting that most Regulation CF offerings do not come close to the maximum.

Where the Reported Figures Disagree

Angel Studios’ semiannual Form 1-SA for the period ended June 30, 2021, was signed Sept. 28, 2021. It reports Regulation CF sales of Class B common stock at $8.90 a share, with net proceeds of $4,611,328 from 561,797 shares.

The same filing’s management discussion puts the raise at $4,999,531 from 561,745 shares. Its cash flow statement labels the issuance as Class A shares, and its equity statement shows 561,725 Class B shares. The filing refers to tens of thousands of investors without giving an exact count.

The Farrell Fritz analysis ties the $5 million raise and about 7,000 investors to Sound of Freedom. Whether the 2021 filing and that film offering describe the same raise is not confirmed, so the 7,000 figure rests on the analysis alone.

The threshold figures also differ. The rule text at Cornell gives $124,000, $2,500 and 5% of the greater figure. Hinshaw’s November 2020 summary gives $107,000 and $2,200 for the same tests. The SEC’s compliance guide gives the same two figures and applies the 5% test to the lesser of the two.