New York City Equity Crowdfunding Lawyer
Every startup or emerging business needs capital, but securing that money is usually challenging for most businesses. Traditionally, businesses looking to start up and expand would look for cash from common sources of funding, including friends and family, business loans, venture capitalists, angel investors, and initial public offerings.
But today, some companies are taking the route of “crowdfunding,” which helps business owners kickstart their ideas and make them a reality. Crowdfunding has become an increasingly popular way for business owners to raise capital without relying on conventional institutional funding. This form of fundraising allows founders to retain more control over their startups.
The idea behind crowdfunding is to convince many people to invest in a business or donate to a cause. There are various types of crowdfunding, including one that allows partial ownership of companies — equity crowdfunding.
What Is Equity Crowdfunding?
Crowdfunding can be a powerful fundraising tool that cuts across traditional channels to seek financial support. In the traditional approach to crowdfunding, you’d offer a first-run product or an incentive to receive monetary contributions. Investors receive no equity and aren’t entitled to repayment.
Equity crowdfunding is a newer option that allows business owners to seek funds from a large number of investors. Also known as investment crowdfunding or crowd-investing, early-stage companies raise capital through equity crowdfunding by offering financial securities to investors in exchange for financing. This is a unique way for business owners to raise capital without taking on debt.
In equity crowdfunding, every investor is entitled to a stake in the company proportional to what they invested. Returns may come in the form of a share of the profits through distribution or dividends.
Equity crowdfunding differs from other methods of crowdfunding, such as donation crowdfunding and rewards crowdfunding. This business funding model provides a more conventional method of raising capital that’s carried out on online platforms. Its digital nature fosters a more liberal, democratized, and open way of financing by enabling a larger pool of investors, dubbed “the crowd,” to invest in early-stage unlisted companies.
The main idea behind this capital-raising method is for business owners to raise funds through small contributions from many investors.
Equity Crowdfunding Regulations
Since equity crowdfunding is a new way of fundraising, regulations surrounding the sector are constantly developing. Nonetheless, the Jumpstart Our Business Startups Act, or JOBS Act, was designed to promote small businesses and protect investors, loosening the regulations set by the Securities and Exchange Commission (SEC) on how small businesses should raise capital. Since its passage in 2012, the JOBS Act has been a buzzword in the startup community.
The JOBS Act makes raising capital easier for startups and early-stage companies. It also allows retail investors to invest in startup companies. The Act includes various provisions that affect startups and how they raise capital through equity crowding.
Regulation CF (Title III of the JOBS Act)
Regulation Crowdfunding (CF) allows non-accredited investors to invest in new businesses through approved crowdfunding portals. This means that early-stage companies no longer have to depend solely on accredited investors for funding but can raise capital from the general public. Startups can raise up to $5 million in capital per year through equity-based crowdfunding.
Regulation D (Title II of the JOBS Act)
This rule allows startups to solicit and advertise their offerings while remaining compliant with exemption requirements as long as they meet certain criteria:
- Every investor in the offering is accredited.
- The company should verify they are accredited, which may include checking tax returns, W-2 Forms, or bank statements.
- The business should provide a private placement memorandum to potential investors.
Regulation A (Title IV of the JOBS Act)
This provision allows companies to sell securities to both accredited and non-accredited investors during Regulation A offerings. Startups must file Form 1-A with the SEC before crowdfunding. Regulation A allows gun jumping, meaning a company may inform the public about its intentions regarding such offerings. This helps the company assess whether the proposed offering will succeed before it launches.
Still, the JOBS Act also increases Regulation A’s “mini public offerings” threshold to $20 million for Tier 1 offerings and $75 million for Tier 2 offerings, with much fewer requirements as far as shareholder reports, disclosures, and other requirements go.
Total Number of Investors
Before the enactment of the JOBS Act, private companies with over $10 million in assets or 500 stakeholders were forced to go public because of higher regulatory burdens. However, the JOBS Act changed the shareholder limit to 500 non-accredited investors or 2,000 accredited investors. This move wouldn’t force emerging companies to go public before they were ready.
Meeting legal requirements while you struggle to raise business capital and achieve success can be challenging. The New York City equity crowdfunding lawyers at Fridman Law Firm can guide you through the rules and regulations affecting crowdfunding in NYC and help you understand how the JOBS Act can affect your capital raising process.
Why You Need a Crowdfunding Attorney in New York
Crowdfunding is a relatively new method of financing. Rather than struggling on your own to raise capital through equity crowdfunding, consider working closely with a skilled New York City equity crowdfunding lawyer who understands crowdfunding laws and requirements. Remember, you must comply with SEC and Financial Industry Regulatory Authority (FINRA) regulations when fundraising through crowdfunding.
Here are various reasons why you need a skilled crowdfunding attorney.
Compliance with Regulations
Crowdfunding regulations differ depending on whether you are raising capital under Regulation A or Regulation CF. An equity crowdfunding lawyer in New York can ensure that you understand and comply with all applicable crowdfunding rules and regulations that apply to your situation. This reduces the risk of legal issues or penalties when raising capital.
The due diligence process can be lengthy and complex. Still, it is your lawyer’s role to conduct comprehensive due diligence, such as background checks, to protect you, your business, and potential investors. Due diligence helps mitigate risks while protecting your business interests.
Structuring the Offering
Equity crowdfunding involves intricate financial and legal considerations. An experienced New York City lawyer can help you structure your offering, determine the appropriate legal entity, draft the required legal documents, and ensure the campaign’s terms and conditions are properly defined. They can also prepare offering materials such as press releases and advertisements.
Keep in mind that crowdfunding platforms have their own requirements for marketing offerings. An experienced lawyer can help you understand what such platforms require from you and your business and ensure you comply.
Intellectual Property Protection
An equity crowdfunding attorney can help you safeguard your rights and interests if your campaign involves intellectual property (IP), such as copyrights, trademarks, and patents. An attorney can advise you on how to protect your IP and ensure you have the necessary permissions and licenses.
A New York City equity crowdfunding lawyer can help you draft, review, and negotiate investor or subscription agreements, highlighting the rights and responsibilities of potential investors. These documents also outline the terms of business-investor relationships. Properly drafted agreements can help avert future disputes.
Equity crowdfunding campaigns come with potential risks for business owners and potential investors. An attorney can help identify and manage legal risks, address compliance issues, provide strategic advice to mitigate exposure, and protect business interests.
Other roles that an experienced New York City crowdfunding lawyer can help with include:
- Strategically identifying appropriate funding portals.
- Identifying underwriters and placement agents.
- Referring you to marketing firms that are good at general solicitation and advertising.
- Identifying potential investor groups and market influencers.
In addition to these roles, a New York City equity crowdfunding lawyer can provide general counsel to founders on various matters relating to their startups, such as employment issues, mergers and acquisitions, corporate governance, and regulatory compliance.
All in all, crowdfunding lawyers play a critical role in providing legal guidance, ensuring compliance, and protecting the interests of early-stage companies in equity crowdfunding campaigns. An experienced attorney can help business owners understand the crowdfunding regulatory landscape and avoid costly mistakes, boosting their chances of a successful campaign.
Why Choose Fridman Law Firm
Violations of SEC regulations can result in heavy fines and penalties, regulatory investigations, and complex legal battles. If you are a business owner considering raising capital through equity crowdfunding platforms, you should know that stringent rules and regulations exist to oversee the sector. This is why you need a reputable NYC crowdfunding law firm to help you protect your business interests and reduce legal exposure.
Here’s why you should trust Fridman Law Firm with your crowdfunding campaign:
- We value client and business relationships
- We have a record of successful deals
- We have vast experience in securities laws and equity-based financing
- We understand reward and donation-based crowdfunding
- We offer guidance to NYC companies across all industries
- We understand the JOBS Act and all its provisions related to equity crowdfunding
Equity Crowdfunding Made Easy: Call New York City’s Fridman Law Firm Today
Equity crowdfunding can be a complex area for business owners seeking to raise capital through online platforms. It can be difficult for startups to navigate an ever-changing regulatory environment. Before offering equity to potential investors, you should consult an experienced New York City equity crowdfunding attorney who can help you understand your legal rights and options and guide you through the entire crowdfunding process.
At Fridman Law Firm, our legal team is familiar with traditional and innovative ways of raising startup capital. Contact us today at 212-262-9823 to speak to our crowdfunding attorneys about your needs and concerns. Let us help you achieve your desired goals.