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Legal Issues Encountered By Small Businesses When Looking for Crowdfunding

Online Financing which is also identified as crowdfunding is a fresh method for entrepreneurs and business to obtain finances for projects and products with the help of the Internet. The entertainment industry has been using the online financing for a number of years and entrepreneurs have now begun utilizing the Internet to publish websites and request for the funding they need to support their ideas.

Crowdfunding websites allow entrepreneurs or businesses to present their ideas to the general public who fund the project without expecting anything in return other than a small gift. The largest of the crowdfunding sites, Kickstarter presents itself as an intermediary between individuals who are in need for funding and provide them with the use their platform to project their ideas to people, who may decide to fund the product or idea with small amounts of money. Authors looking forward to obtaining funding by using this platform may decide to give copies of their book or entrepreneurs developing a product may distribute them to people who contribute significant amounts.

Businesses may become excited at the thought of a new method to raise money for the funding they need with the help of the Internet. However, they are advised to understand that there are certain legal issues which are also involved. This article is addressing some of her legal issues which are encountered by small businesses that are looking for crowdfunding.

The Legal Status Of Crowdfunding In The United States

Crowdfunding

The securities and exchange commission [SEC] regulates the sale of securities to the public and companies not approved by the SEC cannot receive funds from an investor.

The sale of securities to the public as an investment is regulated by the Securities And Exchange Commission [SEC] under the US federal law. It is, therefore, illegal to receive funds from an investor unless the company concerned has received approval from the SEC.

Attempts were made in 2012 to instruct the SEC to exempt crowdfunding from some of the provisions which restricted access to funds from unregistered securities offered by non-accredited investors. The SEC is still to issue its findings but some companies have been claiming that they are in the position to offer securities to accredited investors.

Equity Funding And Crowdfunding Issues

 Crowdfunding

Investors in equities generally demand a say in how the business is managed and small businesses may not have the resources to manage a large pool of investors.

Some concerns have been raised about using crowdfunding as a method to raise funds from investors in the form of equities. They are:

  • Equity investors generally want to have a say in the way a business is managed. They usually demand annual meetings for shareholders which must provide them information about the management of the company. Small businesses do not have the resources to manage a large pool of investors.
  • It can become difficult for startups that accept crowdfunding to find venture-capital or other types of sophisticated investors in later stages.
  • The sole reason why investing has been regulated is for the protection of investors. Investment in any business may not guarantee a return and keeping away certain information which would be available to potential investors may create issues of misrepresentation.

It is for this reason that Eric Savits from Forbes has commented that equity with the use of crowdfunding can be a legal disaster in the making.

Crowdfunding And Intellectual Property Issues

Intellectual property generally refers to business assets which are valuable. They can be in the form of patents, copyrights, trademarks, etc. These assets also need funding before they are brought into the market and crowdfunding is a popular method which is being used by businesses in possession of these assets. However, it becomes difficult to protect the rights to intellectual property when it is projected to crowdfunding sites. Two types of issues have often been noted when financing is sought for assets which are classified as intellectual property.

  • People are promoting content which does not belong to them and are leaving themselves exposed to lawsuits from individuals that are owning the patent or copyright.
  • Ideas projected on crowdfunding platforms can easily be stolen by the others who can also promote illegal versions of patented products.

Several instances of patented and copyrighted material being promoted on crowdfunding sites have been observed by the authorities and the concerned platforms. Projecting a new idea on a crowdfunding platform can also expose the inventor to the risk of his or her idea getting copied. Unfortunately, crowdfunding platforms do not accept liability for any such incidents.

Businesses and entrepreneurs looking forward to projecting their ideas on crowdfunding platforms must understand that they must ensure proper protection for their work and also get information about whether the idea they are promoting has already been patented by anyone. Crowdfunding certainly is an innovative idea to generate the funds needed for a new business but it also comes with a set of legal issues which if not cared for can create major problems for the business or the entrepreneur.

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