How to Crowdfund Legally

Limited Liability PartnershipStarting a new business is an exciting venture! That is, until the realization of just how much money you will need takes you down a few notches. Before you get too discouraged, know that you have several options available to you.

One of those options is crowdfunding. Crowdfunding is the process of raising small amounts of money from a large amount of people- this can be with the help of friends and family as well as people you don’t know. If you approach it correctly, attracting crowdfunding investors can be just what you need to get your business up and running, as long as you’re careful.

Now, the safest way to go about something that has potential legal implications is to know exactly what is allowed and what isn’t. Law enforcement has never taken “I didn’t know I was doing something wrong!” as a valid excuse.

So what should I steer clear of when crowdfunding? 

Promising Ownership

According to Biz Journals, a crowd funder may receive a reward for their donation once the company is up and running, but they cannot claim any ownership or financial gain in the business. For example, would-be authors can promise crowd fund investors copies of their signed books or acknowledgements for donations, but business owners can’t exchange equity for investments.

If you want to give away equity in exchange for funds, you need to work with accredited investors—people who make over $200,000 and have over $1 million in assets.

Forgetting about Taxes

The funds you get from your crowdfunding efforts are considered taxable income. Don’t forget that you must follow the federal and state tax laws you are subject to. If you plan to go the crowdfunding route, calculate taxes into your financial goals.

Breaking Promises

The typical crowdfunding effort is set up in a way that the person asking for funding promises rewards (not equity) to people who invest. Some crowdfunding sites use an all-or-nothing system where if a person reaches their goal, they keep the funding and must follow through on their promises. If they don’t reach their goal, the money goes back to the investors.

If you reach your goal and fail to follow through with your promised incentives, you could be considered in breach of contract. Unless you want to face a class-action lawsuit, follow through on any promises made during the crowdfunding process.

Where should I look for funding?

If you want to start a company or dive into a project that needs funding, sites like KickStarter or IndieGogo are useful mediums for making money. These have been especially great resources for artistic projects, such as publishing a book, starting a food truck, creating an art exhibit, or designing a new product.

Are there any other rules to keep in mind?

Crowdfunding is subject to rules placed by the Securities and Exchange Commission (SEC) and the Jumpstart Our Business Startups (JOBS) Act- these rules are under constant discussion. As seen on Forbes, here are the rules you must follow if you plan on utilizing crowdfunding for your startup:

  • You can only accept up to $1 million dollars per 12-month period through crowdfunding.
  • If you are starting an investment company or a public-reporting company, you cannot use crowdfunding.
  • Crowdfund investors are only allowed to give a certain amount of money during a 12-month period. For investors who make over $100,000/yr., they can only give 10% of their income or net worth. For those who make less than $100,000/yr., they can only give up to 5% of their income (or up to $2,000, depending on which is greater).
  • You can only find crowdfunding through registered broker-dealers or “funding portals.”
  • You cannot advertise except to direct potential investors to your broker or funding portal.
  • If you complete a crowdfunding crowd, make sure you file the correct reports with the SEC.

The laws surrounding crowdfunding and business startups are complicated. To be absolutely sure you don’t cross any legal lines, talk to a lawyer who works with business law.

Originally from San Jose, California, Erika Remmington is a recent graduate of the University of California, Berkeley in linguistics with a minor in business administration. She enjoys spending her time with her husband and 18 month old daughter. She also enjoys rock climbing and outdoor activities. Legal information from this article was provided by Kitchen Simeson Belliveau Llp.

Is Crowdfunding Right for your Company?

Is Crowdfunding Right for your Company?A decade ago, independent-minded entrepreneurs might have scoffed at the idea of asking the public to fund their latest project. Today, more than ever companies are turning to crowdfunding sites like Kickstarter, Indiegogo and Fundable to help turn their start-up dreams into reality. These sites allow companies to connect with potential investors by making them part of the development process, whether they’re a tech start-up building a new product or a chef opening a restaurant.

There are plenty of benefits to crowdfunding, but it’s not necessarily the right choice for every company. Here are four questions you should ask yourself before embarking on a crowdfunding campaign.

1) Are you in it for the right reasons?

While the main goal of crowdfunding is to raise money for your project, don’t make it all about the money – it’s about more than just getting something for free. Benefits of a campaign include promoting your company and product, connecting with new customers and learning about their needs and wants. Savvy customers will sense whether you’re truly invested or just out to make a quick buck.

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Go Against the Crowd: Friends & Family Funding Advice from TrustLeaf

Go Against the Crowd: Friends & Family Funding Advice from TrustLeaf

Photo credit: Silicon Valley Business Journal

Everyone has been talking about crowdfunding lately, but what about momfunding? Or friendfunding? Earlier this week, family loans site TrustLeaf released their first guide on “How to Borrow Money from Friends and Family.” For any small business owner who’s done this kind of loan before, the value of doing it right cannot be understated.

Unlike crowdfunding, where entrepreneurs ask for donations from strangers (sometimes with a gift in return) TrustLeaf helps small business owners raise money through their existing social and family network. “Crowdfunding is great if you have a sleek prototype or a chic new fashion line, but doesn’t make as much sense for say, an auto repair shop.” says Anson Liang, TrustLeaf’s founder.

38% of all US small businesses start out with friends and family loans; on average, borrowing $25,000. Compare that with popular crowdfunding site Indiegogo, which only brings in about $1,000 on average per campaign. Kickstarter performs better, but the vast majority of campaigns raise less than $10,000, which in turn is less than half of friends and family loans on average.

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Beat The Downturn! How Young Entrepreneurs Can Rise To Success

Starting a business as a student is an exciting and eventful experience where you will have to face many hurdles in order to become successful. Throughout the process of starting my own business, I went through several challenges that many students who own businesses face and learned a lot of lessons that I want to share today.

Worrying about your finances is perfectly normal for students and one where having a full savings account, wealthy parents, or another source of capital would certainly come in handy. Starting out on your own can still be done with a small capital, no matter what your financial situation looks like. Continue reading

Guest Post: Can Your Small Biz Use Crowdsourcing With the JOBS Act?

Recently, the Jumpstart Our Business Startups Act (JOBS Act) passed amid much hoopla about how this legislation would be the stimulus that jumpstarts the economy and enables people like you and me to invest in all of these startups without becoming accredited investors, as was previously required by the Securities and Exchange Commission.

Now if you’re a small business owner, the floodgates will open, and you’ll be able to raise tons of money to accelerate your business, right? Probably not. While the SEC is still in its evaluation stage and the actual regulations have not been written, some things are already clear from the text of the JOBS Act bill itself. First, you will only be able to raise a total of $1 million in the course of 12 months, and individual investors will only be able to contribute the greater of $2,000 or 5% of net income if they make less than $100,000 per year or have a net worth of less than $100,000, and they will only be able to contribute the greater of 10% of the net income or net worth of the investor if the investor makes or is worth more than $100,000 and not to exceed $100,000 (see Section 302(a) of the text of the bill for details). So, raising $1,000,000 will require either at least 10 high income/net worth investors or at least 500 lower net worth investors, and probably many more than that.

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