Equity Crowdfunding Terms and What They Mean (2025)
August 03, 2025 • 5 Min Read
Equity Crowdfunding Terms and What They Mean (2025)
Equity crowdfunding allows startups and small businesses to raise capital from a broad pool of investors, including the general public. Under Regulation Crowdfunding (Reg CF), companies may publicly offer securities online through SEC-registered platforms. While this form of fundraising may open new doors, it also introduces legal, financial, and structural considerations that founders may want to understand before launching a campaign.
This informational article outlines several terms that founders may encounter when preparing for an equity crowdfunding raise, particularly under Reg CF in the United States.
Foundational Terms
Equity Crowdfunding
Equity crowdfunding is a method of raising capital where a company sells ownership shares (equity) to investors via an online platform. In contrast to donation- or rewards-based crowdfunding, investors in equity campaigns generally receive a financial stake in the company and may benefit if the company performs well and there is a successful exit scenario, though returns are not guaranteed.
Regulation Crowdfunding (Reg CF)
Reg CF is the legal framework that governs equity crowdfunding in the U.S. It was introduced under the Jumpstart Our Business Startups (JOBS) Act of 2012. Under Reg CF, eligible companies may raise up to $5 million per 12-month period, subject to specific disclosure and compliance obligations.
The regulation includes limits on how much individual investors may contribute based on their income and net worth. All campaigns must be hosted on a registered intermediary, such as a funding portal or broker-dealer.
Form C
Form C is a disclosure document that companies must file with the SEC before launching a Reg CF campaign. It includes important information such as business details, ownership structure, use of proceeds, and financial statements. The offering may not legally commence until the Form C is filed and the campaign is live on the approved platform.
Financial and Securities Terms
Valuation Cap
In equity crowdfunding, many early-stage companies issue securities through a SAFE (Simple Agreement for Future Equity) or a convertible note. These instruments often include a valuation cap, which sets the maximum company valuation at which the investor’s funds will convert into equity during a future financing round.
The valuation cap is not the same as the company’s current valuation. Instead, it’s a mechanism to reward early investors by offering them more favorable conversion terms if the company grows.
Discount Rate
A discount rate is another incentive for early investors. It allows them to convert their investment into equity at a lower price than new investors in a future financing round, usually by 10–25%. If the SAFE or note includes both a cap and a discount, the investor typically receives the more favorable of the two.
SAFE (Simple Agreement for Future Equity)
A SAFE is a contractual agreement where investors provide capital in exchange for the right to receive equity in the future, typically during a priced round. SAFEs are not debt instruments and they do not carry interest or maturity dates. Founders need to consider that SAFEs can affect future ownership dilution and control, depending on the terms negotiated.
Convertible Note
A convertible note is a hybrid of debt and equity. It is a loan that converts into equity under certain conditions, such as a qualifying financing round. Unlike SAFEs, convertible notes usually accrue interest and have a maturity date by which they must either convert or be repaid. Common terms include valuation caps, discounts, interest rates, and conversion triggers.
Cap Table and Ownership Considerations
Cap Table (Capitalization Table)
A cap table is a record of a company’s ownership structure, listing who owns what percentage of shares. Equity crowdfunding may significantly impact the cap table, especially if the campaign results in hundreds of new shareholders. Some platforms manage this by pooling investors into a single line item through a custodian or SPV (special purpose vehicle), if applicable.
Dilution
Dilution occurs when a company issues new shares, reducing the percentage ownership of existing shareholders. This is a common aspect of fundraising. It is important for founders to understand how each new raise, including an equity crowdfunding campaign, can change their ownership over time.
Platform and Compliance-Related Terms
Crowdfunding Intermediary (Platform)
Reg CF offerings must be conducted through a registered intermediary, either a FINRA-registered funding portal or a broker-dealer. These platforms, such as StartEngine and others, are responsible for hosting the campaign, conducting background checks, and maintaining regulatory disclosures. Some platforms offer marketing support or tools to help founders manage investor relations, but founders remain responsible for ensuring that all public communications comply with SEC rules.
Tombstone Ad
Under Rule 204 of Reg CF, companies may share limited public communications, referred to as tombstone ads. These ads may include only factual information such as the company name, a brief description of the business, the offering terms, and a link to the official campaign page. Founders may not include projections, testimonials, or detailed offering highlights outside the platform unless permitted under specific rules.
Testing the Waters (TTW)
Some platforms allow Testing the Waters (TTW) communications prior to filing Form C. This means founders may publicly gauge investor interest, but they must include a clear disclaimer and refrain from accepting funds or investment commitments. TTW under Reg CF is allowed in a more limited fashion than under Regulation A+.
It is crucial that founders review current SEC guidelines and platform-specific rules before engaging in Testing the Waters communications.
Investor and Offering Terms
Accredited vs. Non-Accredited Investors
Accredited investors are individuals or entities that meet certain income or net worth thresholds defined by the SEC. Reg CF allows participation from both accredited and non-accredited investors, but limits how much the latter may invest based on their income and assets.
Minimum Investment
Campaigns often set a minimum investment amount (e.g., $100 or $250) to make participation accessible while still managing administrative complexity. Lower minimums may encourage broader participation but could increase the total number of investors on the cap table.
Perks or Investor Rewards
Companies may offer non-financial perks alongside securities, such as discounts or branded merchandise. These perks must be disclosed in offering documents and are generally allowed as long as they do not mislead or imply future financial returns.
Conclusion
Equity crowdfunding offers a regulated pathway for early-stage companies to raise capital from the public, but it introduces legal and financial obligations that may differ from traditional fundraising routes. Founders who understand the relevant terms, from valuation caps and SAFEs to Form C and tombstone ads, may be in a better position to evaluate whether this model fits their goals.
Before proceeding with a Reg CF campaign, founders are encouraged to consult with legal counsel and review all platform requirements to remain compliant throughout the process.
Disclaimer: This article is for informational purposes only and does not constitute legal, financial, or investment advice. It is not an offer to sell or a solicitation of an offer to buy any securities. Equity crowdfunding involves risks, including the potential loss of invested capital, and may not be suitable for all investors. Founders and companies considering a Regulation Crowdfunding (Reg CF) campaign should consult with a qualified attorney, accountant, or financial advisor to evaluate their specific situation and ensure compliance with applicable laws and regulations.
