Why the New Crowdfunding Bill Could Help – and Hurt – Startups

For years, startups have financed their businesses in a variety of different ways. The most common methods, of course, include bootstrapping, private loans, angel investment, or venture capital rounds.

But if a new bill passed by the House of Representatives and awaiting approval by the Senate and White House is made into law, startups will have a new, somewhat radical way to raise cash: Crowdfunding.

In an article for VentureBeat, corporate attorney Scott Edward Walker explains what crowdfunding is and what it would mean for startups.

In his post, Walker writes that the new crowdfunding bill would allow companies to raise a maximum of $1 million ($2 million if they provide potential investors with audited financial statements) by selling securities through crowdfunding sites like Kickstarter, or social networks like Twitter or Facebook.

But only if they comply with these key provisions:

  • Each investor is limited to investing an amount equal to the lesser of $10,000 or 10% of their annual income.
  • The issuer of the securities must take a number of steps to limit the risk to the investors (all of which Walker details in the full post).

Sounds like a sweet deal for startup founders, right?

There are downsides to crowdfunding as well, one of which is that having hundreds of stockholders can be a management and legal nightmare. Walker breaks down several other key downsides and tells entrepreneurs that are eager to explore crowdfunding what to expect next. To read his full post, click here.

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