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Fundraising Laws Entrepreneurs Should Know

By George Khoury, Esq. | Last updated on

It's a long road building your business from the ground up. When the time comes to grow, entrepreneurs often seek funding from third parties, including friends and family, banks, venture capital firms, and anyone else who might have deep pockets. However, getting funding can be wrought with legal pitfalls. Until recently, an entrepreneur was not allowed to publicly solicit investments into their business. However, now that we are in the era of crowdfunding, the rules have changed.

With the JOBS Act, rules were devised for businesses that wanted to utilize crowdfunding. Also, the the JOBS Act provides rules on solicitation and details about who qualifies as as an accredited investor changed.

Can You Solicit Funds?

Although you may not be able to accept investments from everybody, you can pretty much make everyone aware of the fact that you are seeking investors. The old prohibition against soliciting investors publicly has been done away with. However, while the rule on solicitation has been loosened, the rules on whom you can accept donations from got a bit stricter.

Must Investors be Accredited?

While your friends and family may want to just self-certify that they are accredited investors, depending on the type of investment offering you are providing, you may need to do an independent review of whether they really qualify as an accredited investor. Under the JOBS Act, the requirement to verify that investors are accredited has been made stricter, however, the same act also provides for using online crowdfunding to sell equity.

While crowdfunding for creative projects by individuals has been a popular trend over the past several years, the same may soon be true for businesses. The JOBS Act actually provided regulations for businesses that are seeking to raise capital through crowdfunding initiatives. While project based crowdfunding provides backers with rewards, capital crowdfunding provides backers with actual equity.

While the JOBS Act was passed in 2012, it wasn't until May 2016 that the regulations on crowdfunding actually took effect. Business crowdfunding is restricted however to US entities; no more than $1,000,000 in 12 months; requires using an online intermediary; as well as several other reporting and disclosure requirements. While the practice has been made legal, critics believe that it will not be used due to the low $1 million cap and high cost of administration.

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