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Is Crowdfunding Legal?

By Deanne Katz, Esq. on August 15, 2012 | Last updated on March 21, 2019

The JOBS Act may have authorized crowdfunding but it's not legal just yet even though the law was passed back in April. Small businesses will have to wait for the SEC to set out rules for the process.

Those rules are expected sometime early next year according to the parameters of the Act.

Crowdfunding is an alternative capital-raising strategy where potential investors buy shares in a venture. It can be complicated and the North American Securities Administrators Association has issued an advisory about things to be wary of when considering crowd funding.

Just because the JOBS Act authorized crowdfunding doesn't mean there aren't any regulations about how to go about it.

Business owners will likely have requirements on disclosures to investors once the rules are in place.

For now, the biggest risk for small business owners is getting caught in a scam, reports Huffington Post. People offering themselves as crowdfunding brokers should not be trusted. Offers to help with future deals are likely just a ploy to make a quick buck.

Crowdfunding will be available for small businesses in the coming year. The issue is small businesses that are jumping the gun. NASAA has had reports of owners that have already begun approaching investors.

If that's you, it could mean big trouble since no crowdfunding is allowed before the SEC lays down the rules.

The JOBS Act should give small businesses a boost but like any new law it may take some time to figure out the boundaries of what it covers.

Before you start taking advantage of the new possibilities, talk to a financial advisor or a business attorney to figure out how to minimize potential liability.

Crowdfunding will soon be legal and that is great news for creative small businesses looking for investors. But in the meantime, don't count your chickens before they hatch.

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