How Crowdfunding Can Affect Entrepreneurs

Sep 29, 2016

Recently, crowdfunding has had a lot of hype among entrepreneurs ready to raise capital for their next idea. However, the long-awaited JOBS Act Title III has disappointed many entrepreneurs as the legal complexity and cost of compliance may exceed the benefit of raising the maximum $1,000,000 for their startups under the rules. Although the new law has seemingly made it easier for middle-class investors to act like a venture capitalists, the law creates many legal considerations for the entrepreneurs. 

One-million dollars in any given 12-month period is a limit that may not work for many to launch a complex idea. And there is an added limitation within the cap that the $1,000,000 it can only be reached through maximum investment amounts of $2,000 per investor. So, a startup will need at least 500 individual investors to reach a 12-month maximum. 

Further, startups will still have to file with the Securities and Exchange Commission and provide much information, including: legal registration and incorporation filing documentation, corporate website details, corporate structure, financial statements (independently reviewed if raising over $100,000), prior tax returns (if available), a complete business plan, share structure, and much more. Accordingly, this will not be a one-time process as there are ongoing reporting requirements.

Consequently, entrepreneurs considering crowdfunding should consult advisors such as an accountant and an attorney with experience in helping companies raise capital. However, the need for comprehensive consultation can be cost prohibitive to new entrepreneurs. Further, the laws related to crowdfunding continue to emerge, so it can be difficult to remain abreast of the legal issues and how they can affect the entrepreneurs, which can require additional effort and money.

After a thorough review of the demanding requirements to begin a crowdfunding endeavor, some entrepreneurs may opt to find alternative methods to raising money. Engaging the assistance of a business attorney at the onset of a startup can help prepare a strategy suited to the goals of the entrepreneur and the business.