Have a Great Startup Idea? Find a Good Legal Team First
When you decide to start a business, you need to get all of your ducks in a row. Financially. Mentally. And legally.
The JOBs Act has helped a lot of new businesses sprout up over the last year, and crowdfunding sites like Kickstarter have proven to be the catalyst that a lot of budding entrepreneurs needed. Crowdfunding and earlier access to funding is making it easier for people (especially young people) to start their dream of being self-employed sooner than ever before.
While all of this new business development is lubricating our economy, creating opportunities for employment, and adding to the overall landscape of innovation and creativity, it is also raising legal questions. As I’ve touched on previously, the SEC has gone through many adjustments and set in place regulations to protect both the entrepreneur and the investor.
Here’s a list of the most recent crowdfunding regulations (thanks, Forbes!).
- The amount an issuer can raise is capped at $1 million in any 12-month period.
- The amount a person can invest in all crowdfundings over a 12-month period is capped at 10 percent of annual income or net worth (incomes of $100,000 or more) or the greater of $2,000 or five percent of annual income or net worth (incomes of less than $100,000).
- Crowdfunding must be done through a registered broker-dealer or registered “funding portal.” Broker-dealers and funding portals may not solicit investments, offer investment advice or compensate employees based on sales. Traditional investment banks have shown little interest in crowdfunding, leading to speculation that crowdfunding will be facilitated by lesser-known financial institutions with little or no retail investment track record.
- Crowdfunding requires a disclosure document to be filed with the SEC at least 21 days prior to first sale, and requires scaled financial disclosure, including audited financial statements for raises of more than $500,000.
- Unlike Regulation D Rule 506 private placements to accredited investors following the JOBS Act, crowdfunding does not allow advertising except solely to direct investors to the appropriate broker/funding portal.
- Annual reports must be filed with the SEC by a company which completes a crowdfunding round.
Law firms specializing in business law need to accommodate the new influx of startups and stay up to date on the ever-changing and developing market, and I can’t stress enough the importance of speaking to someone who knows the exact you need to take. Startups have high risk potential, so it’s important that when presenting your idea to investors or to future clients you have everything organized appropriately. Many law firms, such as Manhattan’s Cohen Schneider & O’Neill, are taking note of the new potential market opportunities. One of this firm’s main areas of focus is on entrepreneurship and startups, for which they offer a comprehensive package for those ready to venture out on their own. For example, they can help the budding entrepreneur with particulars such as: required document preparation in the appropriate jurisdiction; compliance requirements and training, drafting and executing bylaws, resolutions, and stock issuance; tax ID registration; as well as brainstorming and consultations with a legal startup team.
So, basically, although things are getting easier in the market for new businesses, you still need to lawyer up, because it’s never easy when things aren’t done by the books. Save yourself some time and lots of money and take care of the legalities before you finish designing your logo.
Alexandra Saville (@CapitalistaBlog) is a PR & Media Outreach Manager. She has experience in the publishing and marketing worlds and started her own publishing company right out of college.