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For self-starters of all kinds, crowdfunding is the go-to method for securing seed money. By leveraging their social connections, entrepreneurs, innovators, and even people who’ve fallen on hard times can get the funding they need without relying on financial institutions for investments.

Although now a staple in American society, crowdfunding is a relatively new concept in the U.S. It only really gained traction in the late 2000s with the emergence of platforms like Kickstarter and Indiegogo, which allowed individuals and businesses to raise funds from a wide internet audience on the basis of donations or in exchange for rewards.

Before passage of the Jumpstart Our Business Startups (JOBS) Act in 2012, securities laws prohibited crowdfunding campaigns from offering securities to the general public in exchange for funding. Now, equity crowdfunding is legal through SEC-registered crowdfunding platforms—as long as crowdfunders remain in compliance with regulatory requirements. Failure to comply with state and federal regulations can result in a number of harsh penalties for entrepreneurs.

If you are a Seattle entrepreneur who has or is planning to use crowdfunding for your business, it’s critical to understand the regulatory landscape. This article will explore the intersection of crowdfunding and securities law, including the compliance requirements, penalties for non-compliance, and how By Design Law can help you navigate it all.

Key Provisions of the Crowdfunding Act

Title III of the JOBS Act is also known as the Crowdfunding Act. This section introduces several key provisions for regulating and facilitating equity crowdfunding in the U.S. It was designed to balance small businesses’ need for access to startup capital with protecting investors from potential risks. Here are its main components.

• Crowdfunding cap. Although the limit was initially set at $1 million, the Crowdfunding Act now caps investments at a maximum of $5 million over a 12-month period.

• Investor limits. The act imposes limits on how much an individual investor can spend on crowdfunding investments over a 12-month period. These limits are based on the investor’s annual income or their net worth and vary drastically from person to person.

• Disclosure requirements. Companies who seek financing through crowdfunding campaigns must file disclosures with the Securities and Exchange Commission (SEC) and provide them to investors and the intermediary. Disclosures typically include business information, the purpose of the offering, how proceeds will be used, financial statements, potential risks, and more.

• Regulated crowdfunding platforms. Crowdfunding transactions must go through an online platform that is registered as a broker-dealer or funding portal with the SEC. Registered platforms are responsible for ensuring compliance with regulations, such as investor education and protection measures.

• Financial statements. Depending on the amount of money being raised, a company may need to provide financial statements reviewed by an independent public accountant. As the amount of money being raised increases, the requirements become more stringent.

• Resale restrictions. In most cases, investors are restricted from selling their securities for one year after purchase. However, there are exceptions, such as selling back to the issuers, an accredited investor, to a family member, or as part of an SEC-registered offering.

• Ongoing reporting requirements. Issuers must meet ongoing reporting requirements, which may include annual financial statements and reports on operation.

The purpose of these crowdfunding regulations is to make crowdfunding a viable fundraising method for small businesses and startups while also protecting the interests of investors. Failing to meet these requirements can result in serious risks and penalties.

Penalties for Non-Compliance

Failure to comply with securities laws and crowdfunding regulations can leave a business vulnerable to significant risks and legal penalties. The following are among the possible consequences of non-compliance:

• Financial penalties. The SEC can impose severe fines on companies and individuals who violate securities laws, potentially jeopardizing the financial stability of a startup or small business.

• Legal action. Non-compliance can lead to a wide range of legal actions, including investor lawsuits, regulatory enforcement actions, and more.

• Reputational damage. Crowdfunding campaigns rely on a trust between a business and its investors. When a business fails to comply with crowdfunding regulations, it can lead to reputational damage among current investors, potential investors, and future investors.

• Restrictions on future financing. Businesses with a history of non-compliance with crowdfunding regulations can struggle to raise funds in the future. They may experience limited access to capital markets, venture capital, and traditional bank financing.

• Operational disruptions. Navigating the fallout from regulatory non-compliance can consume significant time and resources, ultimately diverting energy away from core business operations.

• Criminal charges. When non-compliance also involves fraud or serious securities laws violations, individuals may face criminal charges. In some cases, these charges lead to jail time, financial penalties, and civil litigation.

Additionally, failure to comply with regulatory requirements can lead to a loss of business opportunities. The legal and financial ramifications of non-compliance can sabotage possible partnerships, collaborations, and other strategic business opportunities. That’s why the best course of action is to work with an attorney in designing a proactive strategy to ensure compliance and safeguard long-term business growth. 

How a Seattle Business Attorney Can Help

If you’re preparing to launch a crowdfunding campaign, a Seattle business attorney can help you get started on the right foot. They can help you navigate the complex legal landscape of raising capital through crowdfunding the in following ways:

• Strategic planning, from helping you choose the right crowdfunding model to advising you on the best regulatory pathway for your business’s fundraising efforts

• Ensuring compliance, including preparing necessary documentation, navigating federal and state securities laws, and ensuring intellectual property (IP) protection

• Investor relations, from advising on investor communications to mitigating legal risks

• Ongoing reporting, including handing post-crowdfunding compliance and advising on corporate governance

• Litigation and dispute resolution, addressing any conflicts and legal challenges related to the crowdfunding campaign.

These are just a few of the ways in which a knowledgeable business attorney can help streamline compliance, reduce your legal risks, and maximize your chances of a successful crowdfunding campaign. Ultimately, an experienced business lawyer can not only navigate the complexities of securities law, but also help position your company for sustainable growth post-campaign.

By Design Law: Top-Tier Legal Solutions for Seattle’s Business Community

For Seattle entrepreneurs seeking start-up capital, crowdfunding can be a valuable tool for growth. However, it can also result in legal complications when business owners fail to ensure compliance with securities laws. Engaging with an experienced legal expert before launching your campaign can save you valuable time and money and set you up for long-term success. So don’t wait! Contact By Design Law to discuss your situation with a top Seattle business lawyer today.