Kendall Almerico, the CEO of crowdfunding site ClickStartMe, recently shared some simple rules for entrepreneurs to follow to start a business using crowdfunding. Almerico says that using crowdfunding to start a business allows you to raise funds without giving away equity and creates a phenomenal marketing campaign for your new business if done correctly. Almerico notes that starting a business through crowdfunding is legal and discredits the common misconception that crowdfunding to start a business is prohibited by law. “Nothing could be further from the truth,” the crowdfunding guru notes. “Crowdfunding a business start-up is completely legal in every state as long as you follow five simple rules.”
Misinformation about the legality of crowdfunding a start-up business generally comes from people in the financial industry who warn of advertising or selling stock or ownership in a business online without following SEC registration requirements, according to Almerico. “This is red herring that banks, investment houses and venture capital firms want you to believe,“ Almerico explains. “Yes, the same banks, investment houses and venture capital firms who will not lend you any money to start or expand your business. They are scared to death of what crowdfunding will ultimately do to their business model.”
Here are Almerico’s five rules for new businesses to follow when they choose crowdfunding to start their business:
1. Do not give away equity or profit participation in your business when you crowdfund. Advertising to sell equity or profit participation could turn your crowdfunding project into a “security” which can make your crowdfunding project run afoul of securities laws. Instead, Almerico says, a crowdfunding project may give away “rewards” in exchange for donations, but no equity in the business. “Besides,” Almerico points out, “Why would you want to give away partial ownership in your business when you do not have to?” Almerico notes that with passage of the JOBS Act in 2012, selling equity through crowdfunding will become legal at some point, once the SEC creates rules in the coming months.
2. Do not treat crowdfunding donations as a loan to be repaid, with or without interest. Loans and lending are heavily regulated industries in every state, and it could run afoul of a state lending law if you promise to repay a donation to your crowdfunding project.
3. Do not sell real estate. Like the lending industry, real estate is a very heavily regulated industry. Selling, or offering to sell, a parcel of real estate can land you in trouble in some states. “Land deals are best left to other funding vehicles,” Almerico says.
4. Do not sell or give away anything through crowdfunding that you would not be allowed to sell or give away in your state. For example, if you want to give away bottles of wine as a reward in your business crowdfunding project, be sure you are legally allowed to sell or distribute wine in your state before you do so. “And it goes without saying,” Almerico points out, “that crowdfunding a business and giving away firearms, scheduled drugs, or anything illegal, would not be a smart idea.”
5. If you have a question, ask a crowdfunding attorney. Almerico knows this from his experience not only as a crowdfunding expert, but also as an attorney himself. “It never hurts to get legal advice if you are not sure,” Almerico says. “But, be sure your business attorney has expertise in crowdfunding laws. Most business lawyers do not.”