Crowdfunding for equity from non-accredited investors is not yet permitted online! Do not attempt to crowdfund in exchange for equity from non-accredited investors until the SEC releases regulations.
In April 2012, President Obama signed into law the Jumpstart Our Businesses Act (JOBS Act) which will allow businesses to raise capital from the general public in exchange for equity from non-accredited investors. In more technical terms, Title III of the JOBS Act amends Section 4 of the Securities Act to create a new exemption for offerings of “crowdfunded” securities.
Currently equity Crowdfunding from non-accredited investors is not yet permitted until the SEC releases regulations. However, non-equity crowdfunding platforms such as Kickstarter and Indiegogo have seen many projects receive funding from the crowd in exchange for gifts. The power of the crowd is undeniable and equity crowdfunding will provide one of the largest infusions of capital into the entrepreneurial small-business community and fundamentally change the way small and medium-sized business raise money.
Many small-to-medium sized businesses have struggled with access to capital in a tight lending market which has hindered economic and job growth. Qualified entrepreneurs need capital to hire more workers, increase operations or expand marketing. Yet even the most qualified of borrowers have encountered a cold lending environment with no end in sight.
Entrepreneurs seeking to raise capital via crowdfunding must structure their companies in a way that will appeal to investors while minimizing risk to the corporation. The SEC will require strict compliance with securities laws and any missteps could result in the entrepreneur being personally liable for the entire amount of capital raised. The Law Offices of Lloyd Lee, PC is tracking the latest developments and will be well-positioned to facilitate and execute crowdfunding transactions once the SEC releases funding regulations.
Currently the SEC is attempting to create regulations to minimize the risk of fraud to investors. It is expected that investors making less than $100,000 per year will be limited in the amount of money they can invest on an annual basis. Moreover, businesses and crowdfunding platforms are expected to be highly regulated as well. It will be extremely important for a business seeking to raise capital to hire a knowledgeable business attorney to help navigate the legal issues surrounding a successful capital raise.
Crowdfunding as a source of capital in exchange for equity is not yet permitted and you should not attempt to raise funds via crowdfunding until the Securities and Exchange Commission issues rules and regulations, and also registers funding portals. Any attempt to raise funds via crowdfunding in exchange for equity is currently illegal. The SEC hopes to issue rules and regulations by the middle of 2013.
How to Raise Capital by Crowdfunding?
Entrepreneurs will pursue crowdfunding as a new significant source of capital for their businesses. Investors will comb through countless opportunities in hopes of finding the next big investment opportunity such as Facebook or Google. Undoubtedly, the SEC will put many legal and procedural safeguards in place to protect the general public from fraudulent schemes. Below is a brief summary of the legal steps required for entrepreneurs to attract investors.
Optimal Legal Structure – Corporation or LLC?
It will be of paramount importance for entrepreneurs to setup their investment opportunities with a clean legal structure that is favorable to investment. Investors will not invest in a company that is not properly setup to receive capital investment in exchange for capital. C-Corporations will be the entity of choice, and many of them will be setup in Delaware to attract investment. Delaware is well-known for having the most favorable corporate laws.
Once a corporation has successfully raised capital, the corporation must issue shares to the investors and then observe all corporate rules of governance to satisfy rules and regulations. New shareholders as well as existing ones will demand strict compliance in exchange for their investment.
Compliance will be a major issue for entrepreneurs seeking to raise capital through crowdfunding. The SEC is concerned that complicated schemes to defraud investors will emerge and target unsophisticated and unaccredited investors. The SEC is currently considering diligence requirements before permitting any issuers or investors to participate in crowdfunding. For example, founders, directors and shareholders owning more than 20% of shares would be required to register with the SEC and undergo background checks before being permitted to raise crowdfunding capital.
Any entrepreneur seeking capital through crowdfunding must meet all strict compliance requirements or otherwise risk the cancellation and return of any funds raised. Furthermore, the corporation and it’s directors, officers and shareholders could be exposed to lawsuits for failure to meet strict corporate governance and SEC rules.