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Crowdfunding Startups and Business: State vs. National Laws

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Crowdfunding Startups and Business: State vs. National Laws

Posted by Payroll Data Processing in Blog Jul 19 2016

The SEC (Securities and Exchange Commission) started writing their own take on crowdfunding for companies in a form of new rulings on what it means for companies who use crowdfunding websites to help with marketing their products or resources to the consumers. Currently there are only thirty states that have changed their state’s rules on crowdfunding. Here’s the breakdown on what companies need to know when thinking of using crowdfunding for their own marketing agendas.

When your company is considering crowdfunding, you have to look into what it means for those companies who want to start up their companies without tedious funding from the government or applying for funding in loans or payments to the bank to get the company off the ground. Crowdfunding is much faster for companies who want to target an audience that they are interested in, without having to research their audience ahead of time. Many millennials who wish to start their own business, often use crowdfunding websites which can generate up to nearly $4 billion a year in investment funds. That’s a lot of money.

But here is why the state and national laws seem different per state than they do nationwide. In some states many business want to give back to their community, so they use crowdsourcing. Other times, business want to start up their company by asking for money from Americans around the country. The new law from the SEC means that startup companies can raise up to $1 million from crowdfunding and wealthier individuals simultaneously. This means that the SEC will need the financial filings of companies who choose to do crowdsourcing than applying for loans and have to tell the SEC whether or not they are crowd investors or wealthy investors.

The SEC rulings on money earned range from $100,000 up to $500,000 from crowdfunding. This much finding means that the company would have to require financial documents that must be reviewed by an accountant. Any company to asks for under $100,000 will have to provide a self-certified financial reports. But those companies who crowdsource for over $500,000 in funding will are required to have their financials reviewed by an accountant.

So yet while the SEC guidelines for crowdfunding seem easy to understand, in four states: Oregon, Washington, Colorado and California have different laws that seem more confusing. Oregon’s law states that business can only raise $2,500 per individual. Washington’s law states that investors can only invest into a company’s product through crowdfunding if it is 5-10% of their net worth or income. Colorado’s law states that there is a ban on website funding platforms from charging percentage-based success fees, but are obliged to charge a flat fee. California’s laws are yet to take effect but $200 filing fee, plus one-fifth of two percent of the aggregate value of the securities sold for those investing in a company. But both Colorado and California companies who use crowdfunding can only raise up to $1 million in funding.

Crowdfunding is something new and exciting for companies who want to bring their products to people who enjoy using their services. But some of these new laws might cause more problems than good in the crowdfunding startup campaigns that are all over the internet. Just make sure that if your company wants to crowdfund, check with your state’s laws and the federal laws on these types of methods before you do anything else.