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Avoid Crowdfunding Lawsuits: Plan Advertising Carefully

Starting a small business is no easy task. Marketing plans often overlook social media's power in bringing in initial funding. Marketing efforts for startups lacking traditional funding can turn to email marketing and social media to ask for crowdfunding.

This FindLaw article explains advertising concerns that small business owners should look out for when crowdfunding.

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Crowdfunding Basics

Crowdfunding focuses on a target audience or target demographic as part of a marketing strategy to raise capital funding. Some small businesses incorporate crowdfunding into their indirect marketing plans and marketing goals as a form of marketing strategy.

If you're going to use crowdfunding, keep the following in mind:

  • The maximum amount under federal law that a business can raise in a 12-month period is $5,000,000.
  • Before crowdfunding, know who your ideal customer is.
  • The terms of the offering include the amount of, nature, and price of the securities offered. It also includes the closing date of the offering period and how the money will be used.
  • Crowdfunding marketing tactics must be factual.
  • List the name and business location of the company on marketing channels.
  • List contact information and a brief description of the business.
  • Crowdfunding law allows the issuer's progress toward meeting its funding target to be part of the terms of the offering.

Crowdfunding offers investors securities in a company. A security is equity or interest in a company. The Securities and Exchange Commission (SEC) regulates securities.

Where Do You Crowdfund?

Crowdfunding, even for a local business, should be placed on the intermediary's internet website platform. Other than the notice of the crowdfunding offering, advertising the offering outside of the intermediary social media platform is prohibited.

Suppose you suddenly start an SEO public relations campaign coinciding with your crowdfunding offering. In that case, investor plaintiffs may argue that information you publish outside of it closely in time or during your crowdfunding offering is “advertising" the offering. Public relations can include podcasts, too.

Social Media Marketing for Crowdfunding

Typically, small businesses are allowed to advertise their future product or service on social media. You can advertise products and services in a variety of places, such as LinkedIn, word-of-mouth, Google ads, and email lists.

If you're crowdfunding and offering securities, this isn't the case. The SEC decides what about and when you can post this offer for crowdfunding. It's important your online marketing stays in compliance.

Small business owners can advertise selling security on regulated e-commerce intermediary websites like Kickstarter or GoFundMe. The small business asks the target audience to donate or pre-order to their cause to get it funded.

Indirect Crowdfunding Benefits

Crowdfunding, in addition to raising funds, can also increase brand awareness with an integrated search engine optimization (SEO) marketing plan. Potential customers can also see the product, small business, or service as part of this digital marketing campaign.

Crowdfunding also helps small business marketing in a low-cost way. If your customer base doesn't buy into the campaigns, continuing the business may not be worth it. It could indicate that your product or service isn't what your target market wants. You can then ask a marketing agency for marketing tips.

What Is an Offer?

You have done your market research and decided crowdfunding is the right strategy for your business idea. Small business marketing plans aren't everything you need to get started. There are strict rules about advertising and finding target customers in crowdfunding. The amount you can offer to individual donors depends on their income.

The legal issue is whether communications by your business (“the issuer") is an “offer" or impermissible conditioning of the market that is not allowed.

  • Do not promote your company, product, or service that is inconsistent with how you promoted it before the campaign.
  • Establish your public relations practice before starting your crowdfunding offering if you plan to disseminate company information during the offering period.

The SEC defines “offer" broadly. So, posting to new customers or on social media posts may be considered an offer by the SEC.

Need Help With a Crowdfunding Marketing Strategy?

Seek the advice of an experienced securities lawyer about crowdfunding and your marketing plans. The last thing you want to do is invite an SEC investigation when you begin your business.

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