Crowdfunding And Venture Capital Basics

Not every company has the ability to immediately go public and raise capital through an initial public offering. For those who don’t, one viable option may be venture capital.

What is Venture Capital?

You may have heard of venture capital and private equity being spoken of together. While they are similar, there are technical differences between the two terms.

Private equity is usually an investment made in an existing and established business, whereas venture capital is an investment in a new company (making it, to some extent, a more risky prospect for people looking to invest).

With private equity, investors often will contribute not just money, but will also acquire some form of management or control over the company, whereas in venture capital, the investors are not purchasing any interest in the company itself.

Companies will often turn to venture capital, because they are too small, or too unknown, to get traditional loans from financial institutions. Traditional institutions don’t normally want to invest—they want to loan, with a promise they will be paid back.

However, for those with an appetite for risk, companies often have a very high possibility of bringing in huge money if successful, making technology a large sector where venture capital is used.

Crowdfunding and Crowdsourcing

Much of venture capital today is done in the form of crowd funding, or crowd investing. These are usually investments paid by individuals, as opposed to businesses or venture capital firms.

With these kinds of investments, the donors often don’t have a right to repayment—they are investing, and taking all the risks of an investment. Many times, the payoff for making an investment is just getting the product to market, and perhaps some other bonus, like a discount or some other extra product.

However in crowd investing, the investor actually is buying  part of the company, the same way that they would if the company was on the open stock market. However, the interest being purchased is usually very small. Because the investments are so small, there are usually fewer SEC regulations that must be followed, although investors still expect, and are entitled to, a dividend or payout, if the company does well. In some cases, investors may not be able to resell their investment for a specified period of time, under SEC regulations.

Regulations and Requirements

Some types of crowdfunding may require that your investors have a minimum income, or professional license. The maximum that can be raised through crowdfunding without running afoul of the SEC is $5 million. Generally, if you are just crowdsourcing—that is, you aren’t selling or offering an interest or investment in the business itself, almost no SEC regulation is required, which is why online companies like Kickstarter or Indiegogo can do what they do.

Do you have a question about a loan or investment, or how to raise money legally for your business? Call the West Palm Beach business litigation attorneys at Pike & Lustig today for help today.

Resources:

sec.gov/smallbusiness/exemptofferings/regcrowdfunding

startengine.com/blog/regulation-crowdfunding-101-for-entrepreneurs/