Secrets of Crowdfunding

May 28, 2019

There are at least 375 crowdfunding sites in North America, according to Statista. Many people are already familiar with the concept, including platforms for charitable purposes and ones for artistic projects. But companies looking to raise capital to grow their businesses choose between rewards-based programs, where entrepreneurs offer backers incentives, such as a product or service. And there are equity-based platforms, where companies give shares to backers, rather than pay back investors, as one would a business loan.

But there are rules and regulations, so guidance can be key. For example, a firm that is issuing securities in its campaign can raise no more than $1,070,000 in a 12-month period, according to the US. Securities and Exchange Commission.

Yet “a vast majority of firms don’t come anywhere close to that,” said Alon Kapen, a corporate transactional lawyer with Farrell Fritz whose focus includes the structuring of crowdfunding.

Companies must disclose how the investment dollars will be used or they risk being exposed to liability, Kapen said. It helps for companies to state their intention on “very broad terms – product development, hiring a team, general corporate purposes.”

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