It you are thinking about capitalizing your startup through crowdfunding, you’ll need to understand what crowdfunding is, and what is isn’t. While we all wait for the SEC to finalize Crowdfunding Rules (the current SEC Proposed Rules came in at 585 pages), startups and states are not sitting tight but are finding ways to raise capital.
Reward / Donation-based Funding
The first is what’s called donation-based funding. Reward / donation-based crowdfunding is the most common form of crowdfunding today with sites like Kickstarter and Indiegogo which connect businesses with funders who donate toward a funding goal in return for products, perks, or rewards. With reward crowdfunding, businesses do not sell portions of their companies (equity), rather, they provide rewards such as t-shirts or products to those who donate a certain amount of money.
The second and more recent model of crowdfunding is equity crowdfunding or investment crowdfunding, where businesses seeking capital sell ownership in their company in the form of equity. With equity crowdfunding, individuals who fund (invest) become owners or shareholders and have an interest in a potential financial return, unlike in the donation model.
As September 23, 2013, , and business startups who file with the SEC can generally solicit openly both online and offline, as long as they disclose to the SEC how they are soliciting.
With the JOBS Act, the 80 year old ban on general solicitation of investors was lifted and startups can publicly solicit investments online. HOWEVER, startups, can only make the opportunity to invest open to accredited investors.
An individual accredited investor is “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; or “a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year…”
Interstate vs. Intrastate Crowdfunding
While the SEC Crowdfunding Rules will apply to those companies crowdfunding across state lines, some states have taken it upon themselves to pass laws allowing crowdfunding between companies and investors within their states. In states that have enacted such crowdfunding laws (Alabama, Michigan, Wisconsin, Washington to name a few) companies will have to follow the state’s laws, but can be exempt from the SEC rules and regulations. Colorado has not yet enacted such crowdfunding legislation.
Entity Selection and Crowdfunding
Before you begin crowdfunding, it is critical that your startup is properly formed. Different types of crowdfunding and capital raising call for different types of business entities – and the entity selected can have very serious consequences. Whether you plan to form an LLC, S-Corp or C-Corp, you should first understand what corporate form is appropriate and will allow your startup to raise capital while protecting your company’s assets.
Colorado Startup Lawyers of LaszloLaw
The Colorado Startup lawyers of LaszloLaw provide legal counsel to business startups and existing businesses on a wide range of legal needs. Contact our Colorado startup lawyers today at 303-926-0410 to discuss your business needs.
This blog is offered for informational purposes only and not intended to give legal advice.