In my previous blog post, I described the federal and
state laws that apply to friends and family rounds of financing. To an
entrepreneur trying to raise only $100,000, this will sound complicated and
even overwhelming, as well as expensive. Preparing extensive disclosure
statements and making the necessary filings require hiring an attorney, and
legal fees may make the whole offering not worth pursuing.
The market need for conducing family and friends rounds of investing in an
efficient and cost-effective manner has generated a response in terms of crowd
funding. One of the companies in the crowd funding space is a newcomer called
ProFounder. This is the way it works: A start-up founder who wants to get funds
from family and friends creates an account with ProFounder. He describes the
company, its financials, the investment terms, and risks associated with the
investment. Investment terms are simple: founder offer a share of their revenue
in exchange for the investment (ProFounder currently offers only revenue
sharing, but nothing bars founders from offering other terms through other
crowd funding sites). A term sheet is then created and emailed to the friends
and family of the founder (i.e., people with whom the founder has personal
pre-existing relationship). Those interested reply and the offering is
consummated. Average investor invests only about $1,500, and an average round
is between $35,000 and $60,000. ProFounder also educates the founders on how to
comply with each state's securities laws and provides guidelines for the filing
of the necessary forms and paying the necessary fees. It is the founders'
responsibility to do so in a timely manner.
Assuming compliance with all applicable state and federal securities laws, the
idea of crowd funding is appealing. It is very inexpensive and easy to do. It
also eliminates the necessity of hiring an attorney, potentially saving the
start-ups thousands of dollars. In fact, crowd funding may be just the response
we all need to the problem of securing investments from the general public
instead of VCs or professional investors. It opens doors to millions of
investors who can contribute small amounts to social ventures and start-ups
that would otherwise go unnoticed by the professionals.
Note that crowd funding is not for everybody and in certain situations business
owners would be well advised to hire an attorney.
Read more commentary from Arina Shulga on the
legal aspects of operating new and growing businesses at Business Law Post.
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