Legal Considerations When Crowdfunding
Crowdfunding has become a common way for people to solicit funds for various reasons, from paying student loans to buying real estate for commercial purposes. Because of its popularity and potential for raising a large amount of money, some small business owners consider crowdfunding as a way to raise operating capital. While this may seem like a good idea, the legalities of crowd funding for a for-profit business may cause some small business owners to rethink this approach.
Crowdfunding is the process or practice of soliciting and raising small amounts of money from a large group of people. The most common way crowdfunding is done is through the internet, where the person or business seeking money can reach a large diverse group of people.
Because crowdfunding for a for-profit business often involves the sale of equity in the business, it triggers state and federal securities laws and regulations. One of the biggest hurdles a small business seeking to raise funds through crowdfunding has to overcome is compliance with federal securities registration requirements. To address the limitations posed by the securities regulations, the federal Jumpstart Our Business Startups or JOBS Act was enacted in 2012, and more recently Florida passed the Florida Crowdfunding Act.
One of the exemptions provided under the JOBS Act was to allow businesses to make small public offerings without having to register with the Securities and Exchange Commission for investors through internet crowd funding if certain conditions were met. Small businesses still have to use a registered broker to handle the processing of funds received, and cannot work directly with potential investors. Overall, there are several onerous and cost prohibitive requirements that must be met in order to engage in crowdfunding. However, for businesses that primarily operate and receive most of their sales from in-state business, there is an intrastate exemption that may allow for fewer restrictions under state law.
Florida’s crowdfunding law follows the federal intrastate exemption requirements, and allows Florida registered businesses to make crowdfunding equity offerings of up to one million dollars during a twelve month period through a registered broker. Individual investors cannot exceed certain monetary amounts, and the business seeking funds has to ensure that the people it reaches out to are within the state of Florida. As the money is received by the business through an intermediary, it has to be deposited into a federally insured institution in Florida until the amount sought in the offering is raised, and then the money can be released to the business.
There are numerous other requirements that a business needs to meet to avoid registration requirements, and if crowdfunding is something your business wants to pursue, it is important to meet with a business attorney before taking any steps.
Reach Out to Us for Professional Assistance
If you are a small business owner seeking new ways to attract investors, and would like to ensure you are in compliance with the necessary laws and regulations, consult an experienced business law attorney. To find out more about how a business attorney can help your business, contact a North Miami business law attorney at the Charlip Law Group L.C. for a consultation today.