California Equity Crowdfunding Lawyer
To raise large amounts of capital, California startups in tech and other industries have increasingly been turning to something called equity crowdfunding. This approach involves investors receiving an equity stake in a company in exchange for financial backing. This is different from rewards-based crowdfunding seen on platforms like Kickstarter, which typically involves a contributor receiving merchandise or an exclusive membership for their contribution.
The current moment appears to be highly favorable for equity crowdfunding in California. The unfortunate collapse of Silicon Valley Bank in 2023 marked a concerning period for startups looking to raise funds. However, the collapse of that financial institution created a void that equity crowdfunding platforms appear to be filling. If startups continue to be wary of institutional funding, it will lead to greater adoption of equity crowdfunding.
This approach to fundraising isn’t without significant legal and regulatory obstacles. California equity crowdfunding lawyers can lower these obstacles to allow entrepreneurs greater access to critical funding. With the right legal counsel, early-stage companies can use equity crowdfunding to grow, test ideas, increase marketing efforts, and attract customers.
What Is Equity Crowdfunding?
When the federal Jumpstart Our Business Startups (JOBS) Act passed in 2012, it paved the way for equity crowdfunding. This considerably enhanced the ability of startup companies to reach investors in a cost-effective manner. Because this kind of crowdfunding involves securities, the Securities and Exchange Commission later implemented Regulation Crowdfunding rules to apply crowdfunding provisions outlined by the JOBS Act.
Two federal securities laws outline the essential framework for equity crowdfunding: Regulation Crowdfunding (Reg CF) and Regulation A (Reg A). Reg CF allows emerging businesses to raise up to a particular amount of money from both accredited and non-accredited investors by way of registered crowdfunding platforms. Reg A establishes two tiers of offerings for raising money. Tier 1 allows emerging companies to raise up to $20 million over the course of a 12-month period. Tier 2 lets companies raise up to $75 million over a 12-month period but with limitations for non-accredited investors and additional disclosure requirements.
Under the SEC rules, anyone can make investments in startup businesses through equity crowdfunding, just as they can hold stocks and bonds. However, due to the risks involved, individual investors are limited by the SEC in how much they can invest over a 12-month period. Those with an annual income or net worth is less than $107,000 can only invest a few thousand dollars, while those earning and worth more can invest tens of thousands of dollars but not more than $107,000.
The Benefits of Equity Crowdfunding in California
While equity crowdfunding can be a useful way to raise money in any state, it is particularly effective in a state known for supporting innovation and entrepreneurial spirit. With the help of a California equity crowdfunding lawyer, emerging businesses can bring in non-traditional investors who are attracted to the company’s vision and products or services. These non-traditional investors in California can come from the state’s diverse communities, allowing a business to engage a broader range of people through more than just the goods or services it provides.
Equity crowdfunding is also a great tool for entrepreneurs having difficulty accessing institutional sources of funding. Founders with credit limitations, limited revenue streams, and other fundraising challenges can use equity crowdfunding to grow their businesses.
This approach to fundraising can also help founders keep a major share of ownership equity. Founders with a strong vision are best served by this approach as it allows them to maintain control and pursue a vision that others might fail to grasp. Equity crowdfunding also helps entrepreneurs avoid debt while adhering to California’s ongoing push for responsible corporate behavior.
Ideally, an equity crowdfunding campaign meets or surpasses its fundraising goal. However, even if a campaign falls short, it can still generate significant awareness, enthusiasm, and momentum. This could lead to new opportunities that help get the business to its next stage of growth.
Potential Issues With Equity Crowdfunding in California
California was built on would-be entrepreneurs staking their claims during the Gold Rush. It was a risky strategy, but equity crowdfunding isn’t without risk. If a company’s survival completely depends on the success of a crowdfunding campaign, it might not be a risk worth taking. Other, lower-risk fundraising approaches might be the better way to go. According to data from Startups.com, only one-half of equity crowdfunding campaigns are successful.
Because equity crowdfunding involves founders keeping primary control over their venture, it means they must appeal to potential investors and convince them to provide support. This approach can lead to founders making valuable connections. However, if the campaign fails, it means a very public failure for the founders.
California has many tight-knit local business communities, and shaking off a failed campaign can be very difficult when everyone seems to know everyone.
California’s vibrant entrepreneurial culture can be a double-edged sword, especially when a crowdfunding campaign attracts people focused on second-guessing the founder(s) efforts. While the state is full of people who can bring in entrepreneurial expertise, it’s also full of armchair entrepreneurs looking to raise their profile through their business investments. Founders should be very cautious about how and to whom they provide a voice.
Why It Helps to Have a California Equity Crowdfunding Lawyer
Watching your equity crowdfunding campaign become successful can be as fun and thrilling as the best Hollywood blockbuster. The job of a California equity lawyer is to make sure that movie has a happy ending. California regulators are known for being vigilant when it comes to corporate activities, and the slightest misstep could result in devastating consequences for both a campaign and the business it’s meant to support. This is to say nothing of federal regulators who have the most oversight when it comes to equity crowdfunding campaigns.
California equity crowdfunding lawyers are well-versed in the intricacies of federal and state regulations. They can guide founders through the process of creating and executing their campaign to ensure that it doesn’t run afoul of any regulations. They can help founders create investor agreements that only concede the desired amount of influence to supporters. Crowdfunding attorneys can also help all stakeholders head off disputes before they occur and make the business venture a successful one.
Let Our Team of California Equity Crowdfunding Lawyers Help Your Company Raise Critical Capital
At Fridman Law Firm, we regularly assessed startups with all kinds of legal matters related to fundraising, including equity crowdfunding campaigns.
Unfortunately, seeking funding isn’t as straightforward as it seems. Our team of California equity crowdfunding lawyers can help your organization secure the funding it needs while remaining compliant and protecting it from unwanted influence.
In addition to helping startups secure the funding they need, other areas of our practice include:
- Business formation and entity choice. If a business is informed correctly, it can lead to significant problems, liability, and disputes down the road. Our experienced attorneys can provide counsel when it comes to choosing a type of business entity, drafting essential contracts, developing employee policies, and more.
- Intellectual property law. Whether it’s a secret recipe or a groundbreaking section of code, many startup companies are based on valuable intellectual property. We can help your organization protect its valuable property by helping establish trademarks, copyrights, and patents.
- Mergers and acquisitions. The possibility of a merger or acquisition presents both opportunities and risks. Our attorneys are very experienced at negotiating favorable terms for our clients in these exciting situations