In recent years, crowdfunding has become a useful fundraising option for many small and midsize businesses. Because it is a relatively new method of raising capital, the regulations that govern crowdfunding are not always well understood.
There is an important intersection between common types of business crowdfunding (equity crowdfunding) and state and federal securities laws. Here, our Chicago business lawyers explain what you need to know about equity crowdfunding and securities law.
What is Equity Crowdfunding?
Crowdfunding is the practice of raising money for a project or venture by seeking relatively small contributions from many people. In general, crowdfunding is done over a dedicated web platform, designed to allow people to easily contribute to the project.
The term equity crowdfunding refers to a specific type of crowdfunding in which startup companies and/or small businesses raise capital by offering a small ownership stake in the business to each crowdfund investor.
Federal Law: Crowdfunding Securities Exemption
Though it is an incredibly valuable tool for both startup businesses and supportive investors, equity crowdfunding was initially heavily restricted by U.S. securities law. Essentially, equity crowdfunders are doing the equivalent of purchasing ‘securities’ in the business – at least that is how it is viewed under the law. Prior to 2012, equity crowdfunding was generally only open to accredited investors, those being the investors who the federal government views as having the sophistication and income/assets to take on the risk of investing in a private securities market.
Of course, equity crowdfunding is not quite the same as investment in other types of private securities. Recognizing this key fact, federal legislators passed the Jumpstart Our Business Startups (JOBS) Act. Among other things, the JOBS Act asked the Securities and Exchange Commission (SEC) to adopt regulations to facilitate equity crowdfunding. The JOBS Act allows many startups and small businesses to raise funds through offering equity on a crowdfunding platform without being held down by overly restrictive regulations.
Companies Raising Capital Through Equity Crowdfunding Should Seek Guidance
Navigating the JOBS Act and the subsequent regulations from the SEC can be complicated. If companies fail to comply with certain equity crowdfunding rules, they could be required to register with federal regulators – a potentially costly and arduous task. Worse yet, they may even run into problems under federal securities law.
If your startup company or small business is considering raising capital through equity crowdfunding, it is recommended you consult with a qualified attorney. A business lawyer with experience handling securities law matters will ensure your crowdfunding arrangement is structured properly.
Speak to Our Chicago, IL Securities Lawyers Today
At North Suburban Legal Services LLC, our Chicago business law attorneys have the skills and legal knowledge to advise clients on matters of securities law. If you have questions about raising money through crowdfunding, we can help. To arrange a confidential initial consultation, please do not hesitate to contact us now. We represent business clients throughout the Chicagoland region, including in Aurora, Elgin, Joliet, Naperville, Evanston, Schaumburg and Orland Park.