Crowdfunding: What Is It, And Is It Legal?

Let’s face it: Raising money and finding investors can be difficult. Many investors will want some stake in your business, which creates its own set of legal hurdles and impracticalities. But what about crowdfunding? What is it, and is it something that’s right for your business? 

The Benefits of Crowdfunding

Crowdfunding allows your company to reach out to individual people for investments. Instead of getting a few large investments from some major companies or people with significant money, you instead raise less money, from more people, and often people who you wouldn’t consider to be traditional “investors.”

Most investors pledge money because they see an idea that they like, and want to contribute to it. They may get something in return for their investment, such as an early release product, or some discount.

More Relaxed Regulations

Crowdfunding also has the advantage of avoiding some–but not all–of the regulations that the Securities and Exchange Commission (SEC) require when you go public, or when you promote a more traditional investment. And although crowdfunders do contribute less money than people would in a traditional investment, they are more likely to lose money, because you (presumably) are less stable and a poorer bet than say, Apple, or Microsoft or Amazon or Delta Airlines.

That’s why there are still SEC filing requirements for crowdfunding. But because the SEC knows how important crowdfunding has become nowadays, and because it knows that most companies that engage in crowdfunding are smaller, with fewer assets, it has made some of the investment regulations a bit easier.

Some Rules

Crowdfunders are excused from having to register in the way traditional companies would be when they raise money with accredited investors. However, that also means they are more limited in the amount of money they can request, and receive, from investors.

Crowdfunders are limited to accepting either 5 percent of someone’s net worth, or $2,000 whichever amount is greater, for any investor who earns $100,000 per year or less. For higher worth investors, crowdfunders can accept 10% of the investor’s net worth. The overall crowdfunding limit for companies is $5 million (that means that over that amount, and you’ll have to go through full SEC registration the way any non-crowdfunding company would have to do).

That $5 million cap may seem like a lot, but for a new project, product, or whatever the company is trying to raise money for, the limit can be reached very quickly.

All funding must take place through a “middle man,” usually an SEC approved funding site, or broker.

Companies must have certified financial records and there are restrictions on advertising, including advertising on social media. A business law attorney can review your marketing materials and advertising plan, to make sure it complies with applicable laws.

Call the West Palm Beach commercial litigation lawyers at Pike & Lustig to help you raise money and fund your business the right way.

Resource:

ec.gov/smallbusiness/exemptofferings/regcrowdfunding