What’s Up With Crowdfunding? An Attorney-CPA Weighs In...

crowdfunding

Have you been thinking of starting or expanding your small business?

 

 In working on your business plan, have thought about how you will fund your business?  At some point or another financing a startup or expansion has crossed your mind.  And I am sure you have been hearing a lot about a new form of raising capital through crowdfunding platforms

But, how do you do it?  What are the requirements?  Will it fit your needs?  These are just some of the questions you may have about this confusing new method to raise funds your business.  So, let’s go over some basics of how it works.

First and foremost

First and foremost, using crowdfunding to raise funds requires you to register with the Securities and Exchange Commission (SEC). 

As part of the registration process, you will be required to list the purpose of the business, the management team, provide audited or reviewed financial statements depending on the amount of investment sought (pro formas if the business is a startup), discuss the financial condition of the company, disclose the amount of funds sought, the price for the securities, and how the funds will be used with as much specificity as possible. 

All of these disclosures will be in what is known as the offering. 

The offering is what you will communicate to potential investors regarding the company. Of course, if changes need to be made, they must be made to offering when the change is apparent.

Regarding the investment 

Now, regarding the investment itself, it is important to note the limitations on the investment. 

First, the aggregate investment sought for the offering cannot exceed $1,000,000.00 in a twelve month period. 

That means if you need $2,000,000.00 you would have to use crowdfunding for the first $1,000,000.00 and then look for the other $1,000,000.00 elsewhere, find another option to get the full 2,000,000.00, or obtain the first $1,000,000.00 and the wait 12 months for the remaining $1,000,000.00, if you can wait that long.  

Now there are certain exceptions under Tier 1 & Tier 2 of Regulation A that could allow you to seek up to $20 Million and $50 Million, respectively.

Limitations of your investors

The next issue deals with the limitations of your investors. 

Each individual investor is limited in investing “(1) the greater of: $2,000 or 5 percent of the lesser of the investor’s annual income or net worth if either annual income or net worth is less than $100,000; or (2) 10 percent of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more.”[1]

So, if you put this together and register with the SEC, you can start getting your offering out to investors (i.e., the sales pitch), right?!?  Not quite. 

You see, the crowdfunding website (also known as the intermediary) must be registered with the SEC as well.  Therefore, you need to be sure the crowdfunding website you consider is compliant with the SEC.

Next- Now that you’re registered with the SEC; your offering finalized

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About the author

Senen Garcia

Senen Garcia operates SG Law Group LLP a thriving law practice in multiple states assisting clients with their corporate, real estate, estate planning, and property insurance claim needs.  Additionally, Mr. Garcia has accounting practice assisting small businesses with tax and accounting needs.  Along with his work with SCORE, Mr. Garcia has also provided assistance with the local Small Claims Clinic that provides assistance to individuals filing small claims cases. Mr. Garcia has spoken on a variety of topics such as:  How to start a business, Communication within your organization, Importance of Capital Accounts, What’s in Business Name Anyway?, and Stock Purchase Agreements vs. Asset Purchase Agreements.

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