What are Potential Legal Issues When Crowdfunding Your Startup?

Structure of Your Business Entity

Many people are turning to crowdfunding in Silicon Valley California in order to fund new startups, non-profit projects, and product development. A multitude of new websites such as Kickstarter, GoFundMe, and Indiegogo provide startups with easy access to numerous, potential, worldwide investors through the internet.

Today’s mainstream crowd-sourcing came into existence through the JOBS Act. Despite the passage of the JOBS Act, it was not until the SEC voted to approve Title III of the Act that non-accredited, everyday investors were allowed to use crowdfunding to gain access to equity in startups. These rules, which took nearly three years to be approved by the SEC, have opened the front door and have seen investors flood the crowd-sourcing market. In fact, projections indicated that crowdfunding, in 2016, would surpass the amount of funding raised through venture capital.

While funding through crowd-sourcing is popular and attractive, providing startups with massive access to initial capital at the early stages of the startup’s life means many potential issues may arise.

The Structure of Your Business Entity May Impact Your Startup

As with every business, the selection of a business entity is important when forming your startup. In most states, a business will default as a sole proprietorship if no other business entity is selected. Choosing a business entity is important because it impacts different factors of running a business, from structure to control to tax implications, etc. Owners should carefully evaluate the impact of each business entity and decide which structure best suits the need of the business. Seeking legal advice and counsel from a skilled business attorney is recommended when forming and launching a startup; especially when considering the potential of crowd-sourcing to raise funds.

Crowdfunding Must Follow SEC Rules

Crowdfunding is regulated by the SEC rules passed in connection to Title III of the JOBS Act. Startups, like all businesses using crowdfunding as a source for raising funds, must ensure that they comply with the SEC’s rules. These rules touch upon matters such as the individual amounts each investor can invest in a company through crowdfunding, the total amount a startup can raise through Title III crowdfunding, and required actions if the startup does not reach its goal amount through crowdfunding.

Failure to follow the aforementioned rules can result in fines and legal action against the startup. Like with the sale of any form of equity, startups can also face legal action for either failing to disclose or deceptively disclosing required information to potential investors.

An experienced and knowledgeable business attorney can help startups understand the SEC rules and all those requirements placed upon a startup seeking to raise funds through crowdfunding.

Failing to Plan Ahead

Although the easy access to crowdfunding helps expedite the startup’s venture, startups must still account for the fact that they are launching a public fundraising campaign. Some startups may fail to disclose pertinent information. Other startups may not sufficiently develop a marketing plan that allows them to reach their target investment goal—failing to reach such a goal will result in having to refund investors!

Perhaps the most dangerous failure is that a startup may fail to protect its intellectual property prior to kicking off its crowdfunding campaign. Putting the project online without protecting critical intellectual property, such as trade names or patents, can allow for third-parties to use and/or appropriate the startup’s intellectual property. Moreover, failing to ensure that the startup has not infringed on any existing intellectual property could lead to legal action against the startup. It is important to meet with an experienced business lawyer to protect yourself and your startup.


Although crowdfunding is a new, innovative, and effective way to quickly raise funds for your startup, the process itself is not without risk of legal issues. Raising funds through crowdfunding is most effective whenever a detailed, compliant plan is developed with the advice and counsel of an experienced business attorney. The business attorneys at Startup Company Counsel will work with you to successfully raise funds via crowdfunding. Schedule your initial consultation with us today by calling 408-441-7555 or fill out our online contact form.

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