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How to Navigate Crowdfunding Legal Issues

How to Navigate crowdfunding-legal.jpgCrowdfunding has emerged as a convenient means of connecting up-and-coming entrepreneurs in need of capital with investors interested in funding new ventures.  As a business owner looking to receive funding for your startup, you must be aware of any potential legal issues that could land you in hot water or even put a stop to your enterprise before it starts.

Whether you elect to engage in offering rewards (such as products), taking on debt (for repayment with interest), or selling equity (i.e. shares in your company) as a means of attracting funding from a large group of investors, it is imperative to understand the legal complexities of this type of funding, as well as your personal responsibilities.

Crowdfunding isn't right for every business startup, but for many small companies seeking startup capital, it's an alluring alternative to traditional avenues of lending or investment.  If you want to make the most of it, here are a few tips to help you navigate the tricky legal waters you could encounter.

Hire Professional Help

This is step number one.  Sure, you can learn a lot about crowdfunding basics through research, but thoroughly understanding the legal aspects and obligations of this form of funding can truly only be accomplished when you have knowledgeable and experienced professionals on your side.  There are two professionals you should consider hiring.

The first is a broker or firm that helps to connect entrepreneurs with already assembled groups of investors seeking opportunities.  There may be ways to get the same results on your own, but brokers expedite the process considerably because they have a waiting pool of investors to draw on. Whereas you could spend months or years finding and soliciting potential investors, a broker can quickly connect you to like-minded individuals looking for a business opportunity like yours. 

Your broker will do a lot more for you than simply put you in contact with investors.  This professional can also inform you of any obligations related to the type of investing you're seeking. If, for example, you want to offer equity in your company, you'll need to file with the SEC.

Even if you have started other businesses in the past, you may not be aware of all the obligations and legal aspects involved in taking on investors.  The truth is, any time you take my money from an investor, you are conducting a securities transaction that is regulated by federal (SEC) and state securities law.  This is serious business and the right professional legal help can save you from devastating legal hassles down the road.

This is why you should hire appropriate legal counsel that specializes in crowdfunding.  A suitable lawyer will have the expertise to help you figure out what you must do to comply with existing laws, as well as help you to craft any necessary contractual documents required.

This is also the person you will turn to for legal advice should you come up against roadblocks during the startup and crowdfunding process.

Understand IP Concerns

Intellectual property (IP) can be difficult to protect.  First you must file for needed trademarks, patents, copyrights, and so on.  Otherwise you could find yourself under attack from those who hold similar legal protections and feel that your products are infringing on their legal rights.

You must also protect any trademarked, patented, or copyrighted materials you hold.  It's not uncommon for crowdfunded projects to be pirated by overseas interests, some of which may use not only similar products, but actually steal marketing materials for their own promotional efforts. As the legal holder of trademarks, patents, and copyrights you must protect your interests and go after those who try to rip you off. 

Read the Contract

Contracts will differ depending on the type of crowdfunding you choose.  Regardless, you're promising something in return for funding, whether it's equity, payback, or product.  What happens if you're unable to hold up your end of the bargain?

You need to be very clear about the exchange taking place and the reparations to be made should you fail to deliver as promised.  In most cases it's pretty cut and dry - you meet your obligations or you pay back the money (sometimes with interest).  As long as you understand the terms of your contract, you should be able to avoid getting in trouble.

As you secure funding to finance your startup, the last thing you want is to put your new business in jeopardy by falling victim to crowdfunding legal issues. Do your homework, partner with experienced professionals, and do whatever you can to protect your business interests. This attitude and diligence will help your startup find success.

Tagged crowdfunding, Equity Crowdfunding, PPM, Private Placement Memorandum, Startups