New Business Model

Crowdfunding- what does it mean?

The advent of crowdsourcing websites like Kickstarter have changed the way that Small Business can get funding and how individuals can influence small businesses. Where as before a start-up looked either to family and friends, traditional lending sources (banks and VC investors), or to close friends and family for initial start-up capital, now start-ups can seek funds from strangers online. Now of course every jurisdiction you are in has different rules about raising money through crowdsourcing. In the past soliciting funds by posting in a newspaper (some of you might still remember those) or making presentations to public audiences meant that you had to register the securities (stocks) in your company with both State and Federal SEC (Securities and Exchange Commission). It also meant your company had to comply with State and Federal reporting standards. These rules and regulations were there to protect the unsophisticated investors in general public from being conned into investing in fly by night start-ups and losing large amounts of money.

So, raising money online through a website from the complete strangers and the general public would have fallen under these rules as well. That would mean that every company raising money on kickstarter would need to register their corporate securities with the State and Federal government. Of course the whole point of the internet revolution is to make things easier for small guys to compete with large guys and sites like Kickstarter are supposed to make it easy to start-up your own business. Registering corporate securities would put a damper on this online trend. In fact most individuals with small start-up companies on Kickstarter are probably blissfully unaware of SEC regulations. Why is this? There are two main reasons for this: 1) Most of the investment on Kickstarter is not in exchange for equity in the company or any right to future interest payments, so even though you are raising money for the business you aren’t really investing in the business itself. In fact instead of equity or interest you may get x number of units of a new product or a chance to take a tour of the manufacturing facilities, etc. 2) Many States have passed regulations creating an exception for crowdfunding. For example in October of 2014 Texas approved its own crowdfunding statue (for details you can find the statute here). Similarly, the Job Act of 2012 authorized the Federal SEC to come up with their own rules and regulations for crowdfunding. Those new rules and regulations were just adopted in March of THIS YEAR. (Find more about the Federal Crowdfunding statutes here.) As always here at LawGirl101 I recommend you familiarize yourself with these rules and regulations before just plunging your new business into the world of crowdfunding and preferably consult with an attorney in your jurisdiction.

This blog is not intended to give legal advice. We at law girl 101 always recommend getting legal advice from a licensed attorney in your jurisdiction before taking any legal action or making any legally binding decisions.