The House of Representatives recently passed the JOBS (Jumpstart Our Business Startups) Act, a group of three related measures designed to kick start small business development in the U.S. The developments relate to a new source of fundraising referred to as crowdfunding (see below). If approved by the Senate, the Act would allow companies to go public sooner, solicit investors through the use of advertisements, and allow for the use of crowdfunding to raise up to $1 million without registering with the SEC, or up to $2 million if the company provides investors with an audited statement.
Crowdfunding is, in my opinion, one of the most exciting premises to hit the small business market of ideas. It essentially works like this. You, Small Entrepreneur (SE), have a million dollar idea, invention, whatever. The only problem is that you don't have the capital necessary to develop your idea and market it, or to open a store front, hire employees, etc. Unfortunately, you also do not have the credentials or connections necessary to get funding from a bank or a venture capitalist firm. In days past you might have let your idea die, or wait for some windfall of cash in order to develop it properly.
With crowdfunding, however, you can tap into your social contacts, such as on facebook or twitter, for example, and ask each one of your friends for a small investment, say $100. In exchange, each one of your friends then becomes an owner of 1% of your company. Here's the legal problem, that ownership is a security interest, the same thing that is highly regulated under Securities Law. Eventhough you're no corporate giant being traded on the stock market, you are still selling a securities interest.
Securities laws are strict in order to prevent investors from being defrauded, and the internet happens to be one of the most convenient ways to proliferate fraudulent financial schemes--shipping cars and wirefraud anyone?
Here is a more in depth article on the benefits of this new development.
Crowdfunding and Kickstarter
Eventhough this manner of fundraising may be illegal, that hasn't started people from raising funds this way. Sites such as Kickstarter, provide filmmakers with a forum to post their film ideas, and seek monetary contributions from investors.
Because of the immense potential risk associated with soliciting and selling securities, a Securities Law Attorney can help you navigate the complex requirements in order to avoid potential liability.
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