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Crowdfunding On the Rise: What Do Start-Ups Need to Know?

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Thanks to crowdfunding, start-ups have emerged all across country, transforming the way we do business.  Crowdfunding is a process involving websites like Kickstarter or GoFundMe to accept funds on behalf of any given project or business. It’s fairly straightforward and easy to use for businesses and investors. But recent legislation related to the Jumpstart Our Business Startups (JOBS) Act – which was implemented by President Obama in 2012 in an attempt offer new businesses access to cost-effective capital and provide them with more opportunities[1] – has changed crowdfunding options. And not understanding those options could lead to potentially negative consequences.

According to Forbes, the crowdfunding market has seen a significant increase in recent years, with $16 billion crowdfunded in 2014, and 2015 expected to double that amount.[2] This boom can be attributed to the convenience and security that crowdfunding platforms offer, as well as the opportunity for start-ups to evaluate interest in the market before launching or offering a particular product. That alone is a strong incentive for many businesses.

But where start-ups need to be careful is when choosing a part of the JOBS Act to apply to their crowdfunding process, which can ultimately affect their transferability options and who can contribute to their cause.

Previously, only Title II and IV of the JOBS Act could apply to crowdfunding campaigns, and both have a unique set of rules and regulations that dictate how a business’ funds are sourced, according to Accenture.[3] But on October 30, the Securities and Exchange Commission (SEC) voted to pass the implementation of Title III, which will go into effect after a 90-day commenting period, and will allow businesses to source non-accredited investors to help in crowdfunding campaigns.[4]

This opportunity, which allows businesses to solicit investments from non-accredited investors, is something that people have been pushing for more than three years, according to Forbes.[5] This is an important development for those who are looking to source a crowdfunding campaign because they no longer need to rely solely on accredited investors (or those with a net worth of at least $1 million). Furthermore, Title III allows businesses to accept up to $1 million in total contributions from non-accredited investors each year.

Even though there is serious momentum behind crowdfunding and there’s speculation it will surpass venture capital in terms of the amount of money raised by as early as 2016[6], some are still skeptical about supporting this trend.

Among them, according to Accenture, is William Galvin, Secretary of the Commonwealth for Massachusetts, who is concerned about the risks associated with crowdfunding. He says that with each new trend also comes the possibility of fraud, adding that he notices similarities between crowdfunding and grifters pushing penny stocks because both rely on obscure, low-value investments.[7]

But for start-ups looking to get their feet off the ground, crowdfunding has proven to be a viable option, with hundreds of thousands of businesses every year[8] funding their projects with the help of investors who are passionate about the same thing. What remains to be seen is how start-ups will navigate the JOBS Act and pick the option that works best for their business model.

 

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The information provided in this blog post is for informational purposes only and not for the purpose of providing accounting, legal, or tax advice.  The information and services ADP provides should not be deemed a substitute for the advice of any such professional.  Such information is by nature subject to revision and may not be the most current information availab

[1] https://www.sec.gov/spotlight/jobs-act.shtml

[2] http://www.forbes.com/sites/chancebarnett/2015/06/09/trends-show-crowdfunding-to-surpass-vc-in-2016/

[3] http://fsblog.accenture.com/regulatory-insights-blog/emerging-risks-the-growing-use-of-crowdfunding/

[4] http://www.forbes.com/sites/chancebarnett/2015/10/30/sec-approves-title-iii-of-jobs-act-equity-crowdfunding-with-non-accredited/

[5] http://www.forbes.com/sites/chancebarnett/2015/10/30/sec-approves-title-iii-of-jobs-act-equity-crowdfunding-with-non-accredited/

[6] http://www.forbes.com/sites/chancebarnett/2015/10/27/sec-to-vote-on-title-iii-equity-crowdfunding-rulings-october-30th/

[7] http://fsblog.accenture.com/regulatory-insights-blog/emerging-risks-the-growing-use-of-crowdfunding/

[8] http://fsblog.accenture.com/regulatory-insights-blog/emerging-risks-the-growing-use-of-crowdfunding/


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