Crowdfunding has become a popular way of financing for small businesses. You present an idea to customers, who can donate money to your project. You may give a small token gift in return, but there’s no expectation of equity in your company or a portion of profits.

Some companies have been very successful with crowdfunding, but there are some pitfalls you should be aware of.

Understanding Crowdfunding

Kickstarter is one of the most popular crowdfunding sites. It acts as a middleman, giving your business a platform to promote yourself. The website takes a percentage of the donations you are given. But another type of crowdfunding is peer-to-peer lending. You get loans from others at specific interest rates. Prosper.com is one intermediary. This type of crowdfunding is regulated by state and federal laws.

Potential Issues With Crowdfunding

If you’re trying to raise equity funds from investors through crowdfunding, there may legal issues you haven’t considered. You have to provide information to shareholders and have meetings. Small businesses often don’t have the resources to manage a pool of investors. The SEC may get involved. Equity funding is a legal problem that could blow up in your face.

Intellectual property can be another legal issue on crowdfunding. If you’re offering content that someone else owns, it could open your business up to a lawsuit. More importantly, your own ideas could be stolen by others. Your patent could be copied. Your item may be knocked off.

You need to talk to your attorney and tax advisor before putting up a crowdfunding idea. You don’t want to get into legal problems while you’re trying to raise money to help your business. Fortunately, there are other funding options that don’t have as many pitfalls.

Skybridge Capital Group has financing options to keep you from turning to crowdfunding. Contact us today for more information.