Crowdfunding: A Revolutionary Approach to Business Investments
In general, stock investments have been the traditional form of outside investment available to companies. However, this framework has been an option for publicly-traded companies, which are often relatively large organizations. Now, with the introduction of crowdfunding in recent years, startups can take advantage of the benefits of outside investors to launch products and services. Are you a startup business looking for financial support to launch a new product or service? Are you an investor looking to take part in the latest entrepreneurial ventures? Or, are you a consumer looking to a make charitable contribution to a new business? If you answered "yes" to any of these questions, then changes and developments in crowdfunding may affect you. Please contact us to speak with an attorney who can discuss the applicable rules and guidelines.
Crowdfunding is similar to stock investments in that outside investors provide financial contributions to businesses, which in turn help the businesses prosper. The Securities and Exchange Commission ("SEC") typically regulates such financial transactions. However, the regulations that govern crowdfunding differ from traditional investment regulations. For instance, Regulation D and the Jumpstart Our Business Startups ("JOBS") Act, regulate crowdfunding. Regulation D allows companies that participate in crowdfunding to avoid costly registration fees associated with the SEC. The JOBS Act, which came into effect in April 5, 2012, legalized the Equity Model of crowdfunding.
There are four types of crowdfunding models. The Equity Model is similar to the process of purchasing stock in a company. The other three models are the Donation Model, Reward Model, and Pre-Purchase Model. Under the Donation Model, investors donate money to charities or startup businesses without an expectation of repayment. The Reward Model allows investors to support an organization, or a cause, in return for some recognition, such as memorabilia or public recognition. Finally, under the Pre-Purchase Model, contributors invest in a startup company with an expectation that they will receive its products or services only if the business launches successfully. In the event that the company is unable to raise the necessary funds, the contributor will not receive anything and will likely sacrifice the investment in the project. However, there are some protection measures. For example, individuals who earn less than a hundred thousand dollars a year can invest only up to five thousand dollars a year. In addition, those who make more face a cap equal to ten percent of their annual earnings. Finally, a business can raise no more than a million dollars in any given year, and is required to share financial information with its investors.
At the Law Offices of Salar Atrizadeh, we guide clients in legal matters involving startup businesses by using extensive knowledge and skills to create innovative solutions. You may contact us to set up a free and confidential consultation.