Legal Landmines in Crowdfunding Campaigns to Attract Investors

Legal Landmines in Crowdfunding Campaigns to Attract Investors
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What do the Oculus Rift, Exploding Kittens, and the Fidget Cube all have in common? This company is where all started through crowdfunding campaigns rather than traditional investor means. Unfortunately, many up-and-coming entrepreneurs don’t understand the legal pitfalls that can come with these types of transactions. Traditionally investors know exactly what they’re putting into a company, what the risks are and what they’ll get out of the investment. However, crowdfunding doesn’t offer that same level of transparency.

With Kickstarter, GoFundMe, and Indiegogo, it’s easy for entrepreneurs to put together the capital they need to really get started. There are even specific crowdfunding platforms for entrepreneurs, startups, and business loans. It is common that these startups will face legal trouble down the road, whether they are successful or not.

What is Crowdfunding?

Crowdfunding is the action of utilizing small amounts of capital obtained from a large pool of individuals to finance a business venture. Crowdfunding has made it extremely easy for entrepreneurs to access a network of people through social media as well as crowdfunding platforms and find investors genuinely interested in their ideas and plans.

Through crowdfunding, entrepreneurs are able to expand their pool of investors beyond traditional means. It is possible to work with investors who have the means to dedicate a financial investment but are also interested in spreading the word.

How Should Companies Handle the Campaign?

Legal troubles accompanying crowdfunding aren’t you. Back in 2012, the SEC initiated the Jumpstart Our Business Startups act which set up a regulatory structure for those who raise capital through crowdfunding. That means that there are established regulatory practices that entrepreneurs must abide by if they use crowdfunding to establish or grow their business.

There are a few key issues that show up time and time again when handling invested funds from crowdfunding platforms. First and foremost, there are tax issues.  Most sponsors don’t realize that there are taxes for proceeds of the campaign. Anyone setting up a crowdfunding campaign, especially to start a business, should plan for the taxes that will come with the proceeds.

Then there’s the trouble that got the security Exchange Commission involved in 2012. Based on security laws, those who open the crowdfunding campaign must explicitly explain in the project description that backers don’t have any right to equity in the company or a share of profit. It’s also important that people avoid the word invest, investment, or investor in their pitches as it offers a false expectation.

Can Entrepreneurs Legally Use Crowdfunding Campaigns to Open a Business?

Entrepreneurs can certainly use crowdfunding to open a business, or to grow an established business. In fact, many of these platforms exist specifically for that purpose. However, there are a growing number of claims for fraud and consumer protection. There seems to be a lot of trouble in entrepreneurs unintentionally over-promising or overstating what they can offer when the business opens or when the business reaches certain milestones.

A lot of the legal pitfalls that have to do with crowdfunding a business comes down to the project description. Is possible that your project description could open you up to claims for false advertisement, consumer protection, and fraud or negligence in regard to representation.

It’s possible that cleans brought on by funders could get government agencies involved in investigations and even result in a criminal action. The crowdfunding platform’s terms and conditions are simply not enough to help entrepreneurs understand how to protect themselves.

Learn More About Legal Elements in Crowdfunding Campaigns

Anyone who spent time helping businesses get off the ground understands that finding capital and raising capital it’s a challenge. Crowdfunding has helped mitigate that challenge and made it extremely easy for skilled and able people to enter the market that they would have been able to without crowdfunding. The trouble is that so many don’t realize all the elements that come with crowdfunding campaigns.

The Best course of action is to speak with a Connecticut business attorney about using crowdfunding to attract investors and raise capital. A skilled attorney can help you layout expectations, understand how to craft the project description to avoid legal trouble in the future, and how to handle funds received through the campaign for tax purposes. You can start by discussing these elements of your startup with Aeton Partners.

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