In this internet savvy, social media driven environment, more and more creative, clever, and enterprising entrepreneurs are funding their projects through the use of crowd-funding. A concept borne of necessity, it is essentially where entrepreneurs secure funds for their projects by collecting money from a large number of people—the crowd. Crowds which are usually solicited through the Internet.
There are a number of ways to secure funds through crowdfunding, which generally fall within two categories:
- Donation based crowdfunding—where a funder donates money to a venture or goal, and in exchange, they receive a gift, a tax exemption, or some other perk or reward.
- Investment based crowdfunding—where a funder invests money in a business venture (e.g., Angel Investors), and in return for their investment, they receive a stake, an interest, or a share in the business—either equity or debt. They essentially own a piece of the pie.
While crowdfunding has successfully jumpstarted many business ventures, there are potential issues to be aware of. One of the most important is when the solicitation of funds crosses the line into the world of securities. This is likely to happen when investment based crowdfunding is at the core of the funders marketing strategy. This is essentially the sale of a security, which is governed by both state Blue Sky Laws and the many federal securities laws designed to protect the consumer.
So, before you offer a piece of your business or project to anyone, in exchange for money, KNOW THE LAW! It would be well worth the time and money spent to get a competent legal opinion, BEFORE you ask for money in exchange for an interest. If not, the money you collect to jump start your business just might be used to pay lawyers’ fees and federal and state penalties for offering securities without complying with the many disclose rules.
I am Attorney Francine Ward helping you protect what’s yours! For more information on me, check out my website, or join my conversation on my Facebook Fan Page, Twitter page, or one of my many LinkedIn discussion groups.