Financing is the most important and most frustrating thing a startup faces. The most well known ways startups raise capital are through venture capitalists, angel investors and now crowdfunding.
If your startup is considering crowdfunding as a way to raise capital, there are a few keys to keep in mind. A company can raise a maximum of $1 million per year from individual investors. Additionally, an investor can only invest the greater of $2,000 or 5 percent of their annual income or net worth if either is less than $100,000; or 10 percent of their annual income or net worth if either is greater than $100,000 not to exceed a maximum aggregate amount sold of $100,000. Further, a company can only sell to investors through a middleman – a broker or website – that is registered with the SEC. The middleman can only sell shares that have originated from the company.
Your startup will need to provide detailed financial information; business plans and information that will help potential investors decide if they want to invest – and then you’ll also have to comply with state laws governing companies with shareholders. This is not unique to crowdfunding however, you’ll have to do this for most traditional forms of investment and stock sale – it may just not be at the scale you’ll have to do it with a crowfunding effort. Further, with crowdfunding, you are sharing your idea with the potentially huge numbers of people. With traditional funding you may share your ideas with very few people – all of whom propbably signed an NDA. This is not to say you cannot protect your ideas, it will just be more difficult to keep 10,000 people from sharing your idea as opposed to 10 people.
Finally, you are going to have to wait to start crowdfunding – the JOBS Act provides that the SEC has until January 1, 2013 to make rules for crowdfunding “intermediaries” such as what information must be provided to potential investors, how to ensure individuals do not invest more than is permitted, and so on. So be sure to keep in mind that crowdfunding is one of many options to raise capital for your startup, and it may not be easy as it sounds.
Colorado Business Startup Lawyers
The Colorado Business Startup Lawyers at LaszloLaw located in Boulder, Colorado provide legal counsel to for-profit and non-profit businesses on a variety of business needs including startup and corporate formation, employment law, risk management, corporate protection and legal compliance. Contact a Colorado business startup lawyer at LaszloLaw today to discuss your business needs.