Crowdfunding is a popular way for entrepreneurs and new small businesses to raise money for a project or start-up costs. The premise is that people donate money to a campaign in exchange for a small token gift or the promise of future payback. However, some people make straight donations simply because they believe in the concept and have no expectation of receiving anything in return. Unfortunately, what started out as a promising concept has now run into several troubles of its own.
Problems with Crowdfunding Compared to Other Business Fundraising Methods
With a crowdfunding campaign, investors can only donate a combined total of $1 million dollars over any rolling 12-month period. Companies raising money under Regulation A can receive up to $50 million dollars in donations in 12 months while those organized under Regulation D, Rule 506 have no limitations. Some other ways in which financing falls short compared to other types of fundraising include:
- The maximum investment for each investor must fall within the guidelines for his or her net worth and income.
- It requires a funding portal or a broker or dealer to act as in intermediary.
- Parties receiving the funds must provide an investor disclosure and file it with the Securities Exchange Commission (SEC).
- Recipients must provide full disclosure of liability including a knowledge exception.
- Recipients cannot resell their shares for a period of one year.
- After raising the funds, recipients must continue to provide annual reporting to the SEC.
- Some states require the annual filing of financial reports as well.
- Parties creating crowdfunding accounts cannot legally advertise them or solicit funds for them.
- Exempt investment companies, foreign issuers, traditional investment companies, and public companies cannot use this exemption.
Looking for Alternatives to Crowdfunding?
It can be challenging to understand the best ways to raise funds when you’re just starting out in business. Fortunately, Purevue Capital is here to help. We invite you to contact us today to schedule a meeting with one of our business advisors.