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In 2016, the Securities and Exchange Commission (SEC) adopted exciting new rules that permit companies to raise money through crowdfunding.
As a result, companies may raise up to $1 million in any 12-month period from a broad base of ordinary investors through the internet.
Persons contributing money will receive either an interest in the company (an equity stake) or a repayment of principal invested plus interest (through a debt instrument).
Previously, raising money through crowdfunding involved one party providing money to an individual or company in exchange for some tangible goods. For example, a band raising money for a new album would accept contributions from fans in exchange for future free copies of the new album or band-related goods like T-shirts, concert tickets or key chains.
These crowdfunding offerings—tokens of gratitude, in a way—were conducted through popular internet sites such as Kickstarter and Indiegogo. Now, however, crowdfunding investors can obtain a piece of the actual company or make a loan to the company instead of an investment. The SEC will likely enact other new and innovative crowdfunding campaign platforms to capitalize on the new rules.
In short, as of mid-May, 2016, the new federal crowdfunding law allowed any Average Joe or Jane to invest in startup companies. This means that both startups and small businesses will have increased access to investors and, as a result, increased access to capital.
Please keep in mind these rules the SEC imposes upon companies seeking to raise money through crowdfunding:
There are also limitations on the aggregate amount that individual investors can invest in crowdfunding offerings. For example, If you earn under $100,000 per year, you are allowed to invest up to $2,000 or 5 percent of your annual income—whichever number is greater. If you earn more than $100,000 per year, you are allowed to invest up to 10 percent of your income once every 12 months.
Although the Delaware startups participating in equity crowdfunding will not be mandated to acquire a comprehensive valuation before accepting investors, there will be safeguards in place in order to protect investors. The Investor Protection Unit (part of Delaware’s Department of Justice) will be in charge of oversight.
With the arrival of the new Securities and Exchange Commission rules, the crowdfunding community now has clear definition on how to progress and how to further the potential of crowdfunding campaigns.
Please feel free to contact us with any questions or concerns about starting a Delaware entity for your crowdfunding campaign. We will be glad to assist you.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
There are 2 comments left for 3 Key SEC Rules on Crowdfunding to Raise CapitalCrowdfunding Software said: Tuesday, July 18, 2017
Can you please provide more details on SEC Rules and Regulations regarding fund distribution to investors if any?HBS Staff replied: Tuesday, July 18, 2017
We do not know the details of SEC regulations in regard to crowdfunding. It would be best if you check with your accountant or finance specialist.
Thanks for reading our blog.Janexy said: Monday, June 26, 2017
Hi, I am creating a crwdfunding web for foreigns to invest in real estate in Florida. I am looking for the best legal estructure to benefict us to advantages taxes in this way. Me gustaria poder hablar con algun asesor sobre las opciones disponibles. Thank youHBS Staff replied: Monday, June 26, 2017
Our clients typically form a corporation in order to be able to sell shares of stock and raise capital. You can learn more about the different business entiites here: