Welcome to Lawyers you can Love, a Business Blog

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It’s a brave new world out there—entrepreneurs need to navigate legal landmines, financing expeditions, and sales swamps. And, oh yes, operate the business, develop and service the products, keep employees happy and make money. How do you determine what you should do yourself, outsource, ignore, risk, and/or focus on when it comes to your business? We hope Colson Quinn’s blog, Lawyers You can Love, will provide you with roadmaps and things to look at on the journey.

You can’t make the trip without money.

Equity Crowdfunding is the next big thing (or is it?). The JOBS Act of 2012 (Title III) allows ordinary people to make small investments in businesses—you can raise up to $1 million in 12 months. The delay in crowdfunding regulations, the SEC’s issuance of proposed rules last fall and the recent critical comments of the Small Business Administration to those SEC rules, make us wonder if equity crowdfunding will indeed take off this year.

Major criticisms of the rules include (1) the requirement of audited financial statements required for companies crowdfunding over $500,000, (2) Ongoing annual disclosures, including financial statements, for as long as the crowdfunding securities are outstanding, (3) the business viability for crowdfunding platforms based on restrictions against platform investment in the crowdfunding companies and concerns of the platform’s liability and obligations for due diligence on those crowdfunding companies and (4) the cost of compliance for crowdfunding companies.

So what should you do to prepare for crowdfunding if the SEC finally enacts rules?

Get Real. Is crowdfunding for you? Is your development timeline the same as investors? How much money do you intend to raise? What’s the timeframe? Do you want, let alone have the capacity, to deal with a multitude of investors and the attendant paperwork? Regardless of how the rules come out, you can be sure there will be lots of compliance issues and questions from investors and funding portals.

Get Your Story Straight. You’ll have to provide some form of informational statement, including details on your company, the equity structure. You will need to include a business plan that describes risks and answers investors’ questions. For example, why should investors care about your product or service? What benefit does the world, let alone the investor, get from this product or service?

Financials. Get a CPA if you don’t have one. You may be required to have a “reviewed financial statement” or an “audited financial statement” (the latter will be significantly more expensive) once the SEC rules are issued. You’ll also need last year’s tax return. At a minimum, you need a financial statement for the operation of your business for leases and loans.

Legal. You are going to need legal help to navigate the SEC rules on equity crowdfunding and to ensure corporate documents support the issuance of the shares. Your choice of corporate entity, typically C, S or LLC, will likely impact your ability to do crowdfunding. Some argue that the S corporation with a limit of 100 shareholders won’t support raising money from a large number of people. Others argue that an LLC isn’t viable given state corporate laws on members and transfer of member interests and the lack of corporate structure, not to mention tax issues. Many argue that a C corporation is the best vehicle for equity crowdfunding given its corporate structure and the familiarity of most people with its governance structure, e.g. directors, shares, etc. There are no easy, quick answers on corporate structure. As with most companies, the more investors the less control you have, the greater the complexity in operations, management and compliance.

There are no easy quick answers on equity crowdfunding (Title III). Some even argue that the JOBS Act has better ways to raise money. and

Bottom Line

Get your corporate house and financials in order and be prepared to look at all options on equity crowdfunding once the SEC rules come out (this year?).
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