Crowdfunding is an increasingly popular way to raise capital online. It has been used to raise money for a variety of projects from films, books, websites and more. Because this is a relatively new avenue for small businesses to raise capital, regulations are still evolving. Here are some things you should know about online crowdfunding for small businesses.
There are three primary types of online crowdfunding:
- Contributions and Donations – This type of crowdfunding allows individuals to donate money to help a cause or specific project. Sometimes an exclusive gift is offered to contributors. This is less of a business transaction and more of a donation towards a project or cause; as a result, it is probably not a great fit for most small businesses.
- Non-Equity Business Funding – Non-equity based crowdfunding allows funders to give money to a business in exchange for a product or service. The product may not be delivered until well after a funding goal is reached and in some instances no money changes hands until the full goal is met. If the goal is unmet within the set timeframe no funds are transferred. The funders receive no equity share in the business or product they are funding. Non-equity funding may be a good way to pay for the development of a new product and gauge potential demand.
- Equity Based Business Funding – Still relatively new, yet similar to an initial public offering, equity based crowdfunding allows you to solicit investment capital in return for a share of your business.
- SEC Rules – This year’s SEC rules on equity crowdfunding were designed to open this new capital market. The goal of opening this market is to create competition in the commercial lending market, increase capital investment in small businesses and amp up growth. The SEC rules lay out the fiduciary requirements for equity crowdfunding. The requirements depend on the level of investment and how quickly funding levels are met. You can view the SEC rules here.
- State Requirements –In addition to SEC rules there are state laws on equity funding. These rules may differ from federal regulations. Click here to view a directory of interstate crowdfunding regulations.
- Conflicts and Legal Questions – There is no doubt that crowdfunding offers exciting opportunities for raising small business capital. The problem with any new set of regulations is that they have not been tested by the courts. Some state regulations on equity funding may conflict with the SEC rules and it is unclear how federal and state regulation efforts will be coordinated. It is important to talk with your LegalShield provider law firm to make sure you meet the current requirements as they are understood.
- Selecting a Provider – Online providers of crowdfunding platforms offer a wide range of plans and pricing. It is important to carefully review service agreements and fee structures. In addition, while there are many options for online contribution and non-equity crowdfunding, the options for equity crowdfunding are relatively new. Make sure you do your homework and contact your LegalShield provider law firm for assistance reviewing agreements.
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