Crowdfunding for Investment: How Does it work?

crowdfunding

Crowdfunding the new thing.

Up until recently, funding for business boiled down to getting a loan, private investment such as angel investors or venture capitalists, or the stock market.  However, beginning on May 16, 2016, a new method of obtaining funding for business will commence.  The method involves the crowdfunding market specifically using the crowdfunding platforms such as kickstarter or gofundme to seek investors similarly how it is done on the stock market.  This method presents great opportunities for businesses to get the necessary capital they need to finance their business whether it is to get the business off the ground or expand into a new market for an existing business; though, it comes with important requirements and responsibilities for those businesses seeking the funding.

First and foremost, all businesses must register with the Securities and Exchange Commission (SEC).  As part of the registration, the business must list the purpose of the business, the management team, audited or reviewed financial statements depending on the amount of investment sought (pro formas if the business is a startup), the amount of funds sought, and how the funds will be used with as much specificity as possible.  Most of the information provided to the SEC will constitute “the offering” to be disseminated to the individual investors for determining whether not to invest in a particular business.  Additionally, some states have their own requirements.  As a result, you should contact your state to determine if it has requirements and what those requirements are to ensure you are compliance with those laws prior to embarking on crowdfunding equity.

Now, while the process seems similar to obtaining funding through a public stock market, the regulations are less restrictive.  Of course, with such restrictions come limitations.  Those limitations take the form of the investment itself.  First, the aggregate investment sought for the offering cannot exceed $1,000,000.00 in a twelve month period.  Additionally, each individual investor is limited in investing “(1) the greater of: $2,000 or 5 percent of the lesser of the investor’s annual income or net worth if either annual income or net worth is less than $100,000; or (2) 10 percent of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more.”[1]

 

In addition to the SEC’s registration requirements, there are also compliance requirements that must be performed periodically such as the submission of an annual report that must be available on the company’s website and reporting the company’s financial statements although they need not be audited if the company does not currently perform such an action.  Of course, all of these requirements cease should all the investors agree and the company elects to divest these investors.

 

All of this may seem rather daunting.  However, you do not have to handle this on your own.[2]  We can help you in your quest to raise the necessary the capital for your business.  Our team will be with you every step of the way.  Have questions?  Contact us.  We would be glad to help.

 

[1] See paragraph (a)(2) of Rule 100 of Regulation Crowdfunding.

[2] See Rule 205 of Regulation Crowdfunding.

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2017-08-18T16:07:00+00:00 March 24th, 2016|Blogs|