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Tilting the Scales Business Issues with a Legal Slant

Crowdfunding or Private Placement Memorandum?

Posted in Company Management, Money

Crowdfunding money jar full of coinsSpurred by the frenzy of mid-century modern furniture of the 1950s and 1960s returning in popularity, a growing number of collectors are investing in and holding vintage furniture. Capitalizing on that craze, N. Stile Sune’s start-up Mothbalz Antiques cannot grow fast enough to meet demand. To buy more old warehouses and re-fit them into climate controlled spaces, N. Stile must raise over $2 million and is willing to give his investors an equity interest. Can N. Stile use crowdfunding or must he go the old fashioned route of a private placement memorandum (PPM)?

Due to Sune’s $2 million in capital needs (and more) crowdfunding is not a viable option.

Crowdfunding

The JOBS Act 2012 (Jumpstart Our Business Startups) was designed to encourage funding of U.S. small businesses and to ease various U.S. securities regulations affecting business investment. Enticingly entitled the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” Title III of the JOBS Act had visions of giving small individual investors access to early-stage investment and the enhanced ability to raise money beyond “friends and family,” through social media and from unknown investors like other sites such as Kickstarter.

When compared to other forms of private placements, crowdfunding is not a feasible option for our friend N. Stile Sune and Mothbalz Antiques. As explained in Forbes, here are ten reasons why:

  1. Issuers are capped to raising $1 million in any 12-month period.
  2. Shares issued are subject to a one-year restricted period.
  3. Crowdfunding is capped over a 12-month period at amounts depending upon net worth / income.
  4. Crowdfunding must be done through a registered broker-dealer or registered “funding portal.”
  5. The disclosure document (PPM) must be filed with the SEC prior to first sale and N. Stile Sune would have to file audited financial statements.
  6. Unlike JOBS Act changes affecting accredited investors, crowdfunding does not allow advertising except in narrow exceptions.
  7. Annual reports and possibly more frequent reports must be filed with the SEC.
  8. Legal prospectus liability applies to disclosures.
  9. Extensive due diligence is required, including background checks on management and large stockholders.
Tilting the Scales in Your Favor

Beware. Crowdfunding is far from a start-up fund raising panacea. You can still be sued for fraud for an actual or perceived misrepresentation or omission. One of the best ways to legally protect yourself and your business is also one of the most effective means for garnering serious investor interest.  Disclose as much information as possible about your business, ensuring that if things begin to fall apart and investors threaten to sue for securities fraud or other issues, you can use your disclosure as a powerful defense – through the traditional Private Placement Memorandum – or PPM for short.

For more information on private equity funding, check out our Gray Reed attorneys David Earhart and Mark Wigder.