In the digital age, anything can be done online, including raising money for a business venture. This is why many small business entrepreneurs and inventors turn to crowdsourcing or crowdfunding to raise the capital they need to get their ideas off the ground. While this may be a great way to get the funds needed to start a business, there are laws to be followed in order to ensure it is done correctly.
In its basic form, crowdfunding happens when a person solicits money for a venture or project, usually through social media. In most cases, the people who respond to the solicitation are strangers to the person soliciting the investment funds, and they ultimately receive a share of the venture or project. As with any other investment, the people funding the project do so with the understanding that there is a possibility that the project could fail.
The wide use of crowdsourcing was one reason for the passing of the federal Jumpstart Our Business Startups (JOBS) Act. The JOBS Act allows the Securities and Exchange Commission to regulate the manner in which people invest in crowdfunding ventures. The SEC regulations on crowdfunding are largely aimed at protecting the potential investor. However, they also allow more access for businesses to engage in crowdfunding, for example by allowing offerings without requiring the platform offering the investment opportunity to be registered as a broker.
However, the law and the SEC regulations also require compliance with various registration and filing requirements that can seem onerous to a small business with a limited staff. There are also two different parts of the law under which a business can seek funding from online investors, and each one has its pros and cons. Under one part, for example, only accredited investors can invest in a business. Moreover, those investors are limited in the amount they can invest.
In some cases, even when the small business can raise all the capital needed from a wide range of investors, it can end up costing the small business more in the long term. Therefore, depending on the kind of business a person wants to start, crowdfunding on the wrong platform can be a bad business decision.
Following the SEC regulations on crowdfunding is not an easy task, and may be better handled by professionals so you can concentrate on building your business.
Contact Us for Legal Assistance
If you are a small business owner or an entrepreneur seeking to launch a new business or product and want to use crowdfunding to raise capital, you need to make sure that your solicitation is within the law.
To make sure you are in compliance with both Illinois and federal law when raising capital, contact Momkus McCluskey LLC for a consultation with our experienced DuPage County business law attorneys today.