Crowdfunding comes in three flavors. It’s important to know the difference between Kickstarter, GoFundMe and Wefunder. Kickstarter is reward crowdfunding, GoFundMe is charitable crowdfunding and Wefunder is equity crowdfunding.
Kickstarter allows contributions to projects in exchange for a reward like a T-shirt or product. GoFundMe allows doners to give money to a good cause. Wefunder allows patrons to contribute to a company in exchange for equity at that company.
The U.S. Securities and Exchange Commission (SEC) refers to equity crowdfunding as Regulation Crowdfunding. Startups may now raise up to $1,070,000 from non-accredited as well as accredited investors per year effective May 16th, 2016. Fundraising over $100,000 requires at least a review of GAAP financial statements by an independent CPA for the past two years.
If the issuer has previously relied on Regulation Crowdfunding, a capital raise of more than $535,000 will require an audit. Remember, Form C, which is estimated to take 49 hours to complete, must be filed with the SEC before fundraising can begin.
In addition to the disclosure of GAAP financials, the number of employees, officers & directors, stakeholders with more than 20% voting power, past fundraising rounds, use of funds and all material risks must also be disclosed
With a Regulation Crowdfunding offering, you need to file an annual report once a year with financial statements and a discussion of your business, self-certified by the CEO as well as a business discussion. This must be done no later than three months after the end of the fiscal year.
Investors are also limited in the amount of capital they may invest in Regulation Crowdfunding startups per year. To calculate your investment limit, first choose either your net income or net worth - whichever is lower. If the lower number is over $107,000, you are allowed to invest 10% of it each year. Otherwise, only 5%. For instance, if your income is $96,000 and your net worth $200,000, you'd be legally allowed to invest $4,800 per year in startups.
By law, all Regulation Crowdfunding investments must be made through a funding or a broker/dealer.
If you have more than 2,000 shareholders or 500 unaccredited shareholders, and more than $25 million in assets, you could be subject to burdensome SEC reporting requirements. If you have an S corp, you are limited to under 100 shareholders unless you convert to a C corp or LLC.
Investors confirm that startups and small businesses are very risky and they can afford a 100% loss of all investments. They also confirm they understand crowdfunded securities are not easily resold. There is no secondary market. It could take years for a return.
To learn more about crowdfunding and how the SEC is handling it, visit https://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html .
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