Equity Crowdfunding Lawyer
Startups and aspiring founders looking to raise funds have a number of options, including personal connections, angel investors, loans, and investments from venture capital funds.
Equity crowdfunding is another option that is relatively new and increasingly popular. This approach has been democratizing fundraising and enabling founders to raise capital without institutional funding while still maintaining a controlling interest in their business.
If you’ve ever seen a Kickstarter or GoFundMe campaign for a potential new restaurant, then you’re likely familiar with the concept of crowdfunding. But with these campaigns, investors are often issued rewards — such as an exclusive product or membership. Some campaigns simply ask for donations, with founders hoping that their concept goes viral and people are inspired to donate without any expectation of seeing a return.
It’s important to note that some startup founders forego the crowdfunding approach altogether. Instead, some founders raise capital through a priced equity round, convertible notes, or a Simple Agreement for Future Equity (SAFE).
What Is Equity Crowdfunding?
Equity crowdfunding is a security-based way of raising capital. Instead of offering rewards or asking for donations, a founder can issue shares of their organization in exchange for financial backing from the public.
Typically, equity crowdfunding entails collecting small amounts of money from dozens or hundreds of investors. In a common setup, investors could sign on for just $100. This strategy is different from seeking large investments from venture capital firms or angel investors, which tend to be out of reach for a lot of startups and even established small companies.
Equity crowdfunding is more regulated than straightforward online fundraising campaigns like those seen on Kickstarter. Equity crowdfunding is also referred to as Regulation Crowdfunding because it’s regulated at the federal level. Despite the fact that equity crowdfunding doesn’t involve selling shares on a stock exchange, a company is still providing equity to investors in return for capital, which invokes securities laws, among others.
The success of an equity crowdfunding campaign mostly depends on the business concept. However, it’s also important to design an engaging campaign that convinces people to make an investment in a business. The most effective equity crowdfunding campaigns typically excel at communicating a few key details, including the financial goal, how funds will be used, target customers, expected profit margin, unique value proposition, and why investors ought to back the company.
With equity crowdfunding becoming popular, a number of online platforms have popped up to support it. Equity crowdfunding platforms were mostly focused on consumer-facing industries, but B2B companies have increasingly embraced them.
These platforms attempt to simplify the process by providing a framework for collecting investments. These platforms also offer added features like marketing support and payment processing. These platforms are regulated and have strict limitations because they are registered with the Securities and Exchange Commission (SEC). For example, there is a limit on individual contributions that are designed to protect nontraditional investors. Startup founders looking to use an equity crowdfunding platform should do their research and consider overall costs from legal fees to platform fees.
As with every type of fundraising, equity crowdfunding has pros and cons.
The Pros of Equity Crowdfunding
Equity crowdfunding is a great option for startups struggling to secure major funding from established investors but still generating significant interest from the general public. It’s also a great option for companies and founders that cannot access institutional funding due to credit issues, limited revenue streams, or other challenges related to securing a business loan.
The power of equity crowdfunding is based on the power of collectivism. A business that goes this route might be able to draw in nontraditional investors who support the concept. Also, appealing to a larger number of investors opens up the possibility of raising more money than expected. Even a campaign that falls short of its crowdfunding goal can still increase visibility and build excitement before a business is even launched.
Equity crowdfunding also empowers founders by letting them structure a campaign so they retain most of the equity in a business. Founders who successfully use this method can also raise funds without amassing debt.
The Cons of Equity Crowdfunding
While equity crowdfunding is a useful financing option, it’s not for every organization. For example, companies that will live or die through a crowdfunding campaign are taking a serious risk. According to a report from Startups.com, the average crowdfunding campaign has a success rate of 50%.
While the ability to maintain primary control is a major appeal of equity crowdfunding, it also means that founders are on the hook for marketing the campaign and engaging potential investors. This can be time-consuming, and there’s no guarantee all of the hard work put into a campaign will pay off. If it doesn’t, it means a very public failure.
If a campaign is successful and additional stakeholders are brought into a business, it can make for a more complicated leadership situation. Just because somebody is willing to financially support an idea, it doesn’t make them a business expert. Outside advice and constructive criticism can be useful, but if the wrong people have too much of a say, it can have devastating consequences for the company.
Why You Need a Crowdfunding Attorney
As noted above, equity crowdfunding is regulated at the federal level, and therefore, startup founders must follow all regulations. Those that do not run the risk of significant negative consequences, such as the refunding of investments or the SEC freezing a company’s ability to offer additional shares. Equity crowdfunding is also a newer fundraising approach, which means regulations governing it are likely to evolve.
Because of the seriousness and complexity of these regulations, it’s a good idea to have legal counsel when embarking on an equity crowdfunding campaign. Attorneys that specialize in startup law are well-versed in the requirements and complexities of equity crowdfunding. An equity crowdfunding lawyer can guide founders through the process of creating a campaign, registering with the SEC, and structuring investor agreements. An attorney can also help founders resolve any dispute and protect the fledgling business.
Let Our Legal and Entrepreneurial Expertise Support Your Equity Crowdfunding Efforts
At Fridman Law Firm, we leverage our unique blend of legal and entrepreneurial know-how to deliver results for startup companies, whether they’re in the midst of fundraising or they’re scaling up initial operations.
We are also a boutique law firm that provides the kind of personalized service that startups expect and need. Based on the needs of our clients, we tailor our legal services in the following startup-centric areas:
- Startup law. Many of our clients are startup founders who are driven by growth and innovation. We help our startup clients raise funds, negotiate agreements, and navigate the myriad legal issues that come with founding a company. We lighten the legal burden for these clients so they can focus on their core offerings.
- General Counsel. Modern corporate attorneys have an increased role when it comes to developing corporate strategy. Taking on the role of legal strategist, our general counsel services assist with everything from compliance to contract negotiations to crisis management. These services are designed to help startup companies become fully-developed enterprises.
- Intellectual property. Whether it’s a patented invention or carefully guarded trade secrets, intellectual property is usually the beating heart of any startup company. Our team of legal experts is well-versed in intellectual property law and helping our clients leverage their exclusive rights to monetize their original concepts.
In addition to these areas of startup law, our law firm is also skilled in legal areas that are more relevant to established businesses.
How Can Fridman Law Help You?
Our corporate law services help established companies draft licensing agreements, conduct negotiations, form partnerships, and more. Our firm also specializes in mergers and acquisitions for companies looking to take advantage of unique organizational opportunities.
If your company is currently looking for legal services related to equity crowdfunding or growing your business, send us an email or call our corporate at 212-262-9823 to arrange for a consultation.