Understanding the Legalities of Crowdfunding
The internet has changed the way that our economy operates. That’s nothing new. But although the internet is hardly new, business continues to use it in new ways. One such way is through crowdfunding. You may be aware of what crowdfunding is—but do you know the legalities of crowdfunding?
What is Crowdfunding?
Unlike a business that may raise money through the sales of shares or stock, crowdfunding is the soliciting of funds through individual donations (which can come from people or companies). Think of companies like Kickstarter, as examples of crowdfunding platforms that connect companies with investors. Crowdfunders often raise a little bit of money from each individual donor, as opposed to traditional funding, where an individual donor may contribute thousands or millions, in return for a share in the company.
Crowdfunders promote their product or service, and those who like it contribute. Contributors usually don’t get a share or interest in the company, although they can. Usually they will get the product itself when made, or other perks or discounts.
Government Regulation and Limitations
But crowdfunding is still asking for investments, and that means that the Security and Exchange Commission (SEC) has authority. Yet, full regulation by the SEC is costly, and complex—so much so that it may stifle individual inventors and business owners.
The good news is that there are exemptions for crowdfunders, that make SEC regulation easier and more streamlined.
For the most part, crowdfunders don’t have to comply with most SEC regulations that apply to large companies selling shares on the open market, so long as they agree to abide by certain limitations.
Investors to crowdfunders are limited in how much they can invest, based on their annual income and net worth. Investors can invest between $2,200 to a percentage of their net worth. The SEC publishes a chart, telling crowdfunders what their investors can legally invest.
Crowdfunding doesn’t mean careless; financial documents may need to be audited or certified by professionals, and there are some restrictions on how much a crowdfunder can advertise. The extent to which records must be audited depends on how much the company raises.
Crowdfunding is limited to a total of $1.07 million in any one year period, from any and all investors combined, which means that for larger projects, crowdfunding may not be ideal. That number seems like a lot but for a company dealing with accounting, legal services, and research and development, $1 million can be spent pretty quickly.
Still, crowdfunding is one way that a person with an idea can try to make it big, and compete with the larger companies. If you’re thinking about crowdfunding, remember it isn’t the Wild West—get legal advice to help you navigate the legalities of raising money for your idea.
A good business lawyer can help your business grow. Call the West Palm Beach business litigation lawyers at Pike & Lustig to help your business expand safely.