Articles Tagged with crowdfunding

AdobeStock_133739956-300x200New technologies have drastically changed the ways in which new startups raise capital. Securities laws and regulations are adapting to these changes to ensure that investors are still protected under federal securities laws when investing via new technologies. Regulation CF (aka Title III of JOBS Act) is a relatively recent rule that took effect in 2016 and recently updated in 2020. It allows new business startups to raise equity through crowdfunding, which means private from all Americans, instead of the richest 2% Americans. More importantly, crowdfunding is typically used for new companies to turn their customers into their investors, which is exciting news for startup founders. Learn more about how crowdfunding works, what its legal limitations are, and how to determine whether Regulation CF is the right tool for your new company’s capital funding, is added to every startup founder’s to-do list.

New Rules Raising Investment Limits

According to the SEC, companies currently may raise an aggregate of $5 million in a twelve-month period through crowdfunding securities. This is a significant increase from the original $1.07 million limit. The new limit greatly expands a new company’s ability to raise capital through crowdfunding. These changes also work to level the inequalities faced by small companies looking for startup funding options. Traditionally, large companies have had a competitive advantage in access to startup funding, but crowdfunding has changed the dynamic considerably.

AdobeStock_284509904-300x203Crowdfunding has become a popular means of funding new projects. Especially here in Silicon Valley, crowdfunding is an important driver of innovation. Yet increased use of crowdfunding has led to increased regulations. Companies can now offer and sell securities through crowdfunding platforms, and as with any security, these transactions are regulated by the Securities and Exchange Commission. It is important for any business offering securities through a crowdfunding platform to understand all legal obligations before using this medium.

What is Regulation Crowdfunding?

Crowdfunding refers to a financing method in which fund is raised through soliciting relatively small individual investments or contributions from a large number of persons. Crowdfunding is a way to use a social media platform to fund work initiatives, charitable causes, and almost any other project you can imagine. Crowdfunding can even be used to buy and sell stock in a company. That said, stock is a security that is regulated by the SEC. As with any other transaction involving a security, buyers and sellers must adhere to SEC regulations throughout the transaction. The SEC has recognized the increased use of crowdfunding in secured transactions. In response, it has issued specific rules for the offer and sale of securities through crowdfunding.

Types of Crowdfunding for Investors

Like other types of investments, all crowdfunding campaigns are not created equal and one campaign can vary significantly from the next. There are two main types of crowdfunding investments on which we will focus here: reward-based crowdfunding and equity crowdfunding. However, it is important to realize that these are not the only types of crowdfunding available for investors in today’s market.  In addition, there are many guidelines, requirements and regulations differing for each type of crowdfunding.

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Reward-based Crowdfunding

What is Crowdfunding?

Crowdfunding refers to entrepreneurs seeking relatively insignificant financial contributions from a large number of people, often via social media or other internet networks, to fund the start or growth of a business venture. According to one report, more than 600 crowdfunding sites exist and raised billions of dollars for various types of businesses in 2015 alone, worldwide.

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Types of Crowdfunding