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SEC Proposes Rules on Crowdfunding

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Crowdfunding is a way for just about anyone or any small organization to raise money. Many individuals make sometimes micro-donations in amounts as low as five dollars. But if you can get enough people along with a few larger donations, a young business can get itself up and running. You may have even read a post here recently about how crowdfunding is being used by some craft breweries.

Back in October, a Brooklyn bakery and cocktail bar called Butter & Scotch, started a Kickstarter campaign in order to raise $50,000.00, so they could sign a lease and build their dream space. They surpassed their goal in the time allowed with the help of 528 backers.

Backers receive different incentives like thank-you shout outs on social media, tote bags, aprons, or a menu item named after them. As the pledges increase, the rewards get sweeter. Pledges of $2,500.00 gave backers a private party for 20 friends including custom beverages and desserts.

Because crowdfunding is so popular, there are organizations interested in gathering together many small investors and giving them shares of their companies instead of customized incentives. However, the laws are strict about buying and selling stock in private companies.

On October 23, 2013, the Securities and Exchange Commission released proposed rules on crowfunding. An article on Crowdfund Insider seems a bit wary of the proposed rules.

“It looks like the SEC has purposely tried to make equity crowdfunding expensive. They were tasked with taking a simple nine page law that passed Congress with overwhelming bilateral support and creating rules that would give the average small businessman a way to fill the void left by banks unwilling to lend them money. Instead, the SEC has created a quagmire of complicated rules and economic roadblocks. If a small business needs to raise $100,000, are they going to spend $15,000 in background checks, compliance costs and legal fees to give equity crowdfunding a try, knowing that if they do not reach their goal, they do not get the money raised, and are out the up front costs?”

Currently the SEC is taking comments on the proposed rules. The deadline for comments is February 3, 2014.

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December 2nd, 2013 at 7:11 pm

Posted in Legal News,Startups

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