Last Updated: 05.07.2022
As a Baltimore Small Business lawyer I recently had a potential new client come into the office who said that his/her business was going to be funded on the crowdfunding site indegogo. The first thing I thought was, “cool.” Second thing was, “what a legal and regulatory mess.”
Crowdfunding: when it works
Crowdfunding (very simply) is when you go to strangers with an idea and ask them to fund your (insert blank here). Often times it’s an art project, a movie, a charity fundraiser, or some other creative project (no matter how silly). This type of funding works great for non-profits and for creative projects where the funder is not attempting to make a profit or give up ownership of the concept but rather wants to involve the group with the creative process and raise funds in an independent fashion free from the fetters of “corporate ownership” of the idea. Some examples would be independent films, documentaries, etc. Often if the fundraising meets its goal, the funders get a free copy of the movie (song, album, art, etc). This seems to work well for the crowdfunding model.
Crowdfunding: when it doesn’t work
There are a couple of scenarios wherein my legal opinion crowdfunding is a bad idea:
- Anytime you are giving up ownership of your company to stockholders in exchange for money. SEC regulations are still in limbo for crowdfunding, despite having authorization legislation passed by Congress and signed by the President has been in place since 2013. All companies that would source crowdfunding for their equity shares would be required to comply with SEC regulations for secured equity transactions. This is an extremely costly proposition and places the company in legal limbo if they fail to comply with securities regulations.
- Anytime you have an idea that is easily stolen. Imagine that, people on the internet steal good ideas?? If you have a concept that you are seeking crowdfunding for, you are going to be required to post pretty much your whole business plan online to receive the funding. You should seek counsel to protect your idea, through intellectual property protections, to prevent some of this theft. BUT frankly, some ideas are better left hidden until fully funded. Seeking other investors may be wiser if your idea is highly coveted and easily stolen.
Crowdfunding: P2P loans as an alternative?
Can you get a loan instead of giving up ownership? Yes. but you may not be able to borrow as much money as the guy making potato salad on kickstarter.
ENLawyers Baltimore Small Business Bottom Line
If you’ve got a good idea, there will be money available for you to start your business. Sometimes it will take a combination of creativity and hard work to locate the right mix of investments and equity to get your business up and running. If you’re thinking of starting a small business, contact your ENLawyers for your legal guidance!
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