- Equity Crowdfunding for Startups
- May 21, 2016 | Author: James H. Gulseth
- Law Firm: JGPC Business & Corporate Law - Pleasanton Office
How to use Equity Crowdfunding to Fund Your Startup
Equity crowdfunding has only recently become available to startups in the United States.
Not long ago, startups that sold stock to investors over the internet risked running afoul of federal securities law regulators. If you were caught soliciting investors online in violation of federal securities laws you were in violation of federal civil and criminal laws and regulations and subject to prosecution by federal and/or state agencies.
This has all begun to change since the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012. Effective in mid-May 2016 Startup founders can legally use online equity crowdfunding to raise seed capital. They can get their business off the ground without having to beg Venture Capitalists for a meeting.
Of course you still need to follow the rules or the SEC will come for you. But things have come a long way in just a few short years.
What is equity crowdfunding? How does it work? And how do you take advantage of it without getting into legal hot water?
Keep reading. We will answer all of those questions and more in today’s article.
What is equity crowdfunding?
Equity crowdfunding allows a business to raise capital by selling stock to people over the internet. As with other crowdfunding models, a startup describes its product and business plan and what contributors will get for investing.
What makes equity crowdfunding unique from other crowdfunding models is that with equity crowdfunding the startup is actually selling an ownership (an equity) interest in the company rather than a product, a CD or T-shirt. This sale of stock makes equity crowdfunding subject to state and federal securities laws. It has taken the SEC awhile to come up with the rules regulating equity crowdfunding. The regulations governing equity Crowdfunding became effective in mid-May 2016.
Is equity crowdfunding right for your startup?
It’s not easy to raise early capital for a startup or small business. If you aren’t super wealthy then launching your startup can be a real challenge. Most entrepreneurs tap into their own personal funds, credit cards, high-interest bank loans, or investment from friends and family.
Many dream of finding an angel investor or Venture Capital firm to fund their startup. But that dream rarely comes true. Venture capitalists reject 99% of all the business proposals they get. Those who are lucky enough to find their dream investor often wind up giving away control of their business in exchange for the money. A few years down the road they wake up and realize they have worked their tails off to build a business for someone else.
Crowdfunding allows you to go around the traditional funding route. You can appeal directly to an audience of people who may be as passionate as you are about what you are doing. If your idea is good enough you may be able to attract hundreds or thousands of small investors who want to help you make your vision a reality.
How does equity crowdfunding work?
It has taken some time for federal securities regulations to catch up with the rapid change in communication brought on by the internet. In the United States equity crowdfunding is only now possible because of changes made by the JOBS Act in 2012.
The JOBS Act contains several sections. Title III of the Act deals specifically with crowdfunding. The SEC passed final rules for Title III in October 2015. These rules went into effect on May 16, 2016.
The new rules will allow unaccredited investors to invest directly in startup businesses. Investors will be limited to no more than 10% of their income or $5,000 per year.
Issuers must select a crowdfunding platform and work with an attorney who can guide them through the process of raising capital under the JOBS Act exemptions.
This article was originally published on JGPC.com.