Sunday July 21, 2019

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New Law Will Allow Startups To Avoid VCs

Seal of the U.S. Securities and Exchange Commi...

Seal of the U.S. Securities and Exchange Commission. (Photo credit: Wikipedia)

Startups have always had to bootstrap or receive funding from venture capitalists. However, a new law, awaiting to be put into effect by the Securities and Exchange Commission,  will allow small firms to offer equity through crowd funding. So far, crowd funding has only been used to support artists, inventors, and filmmakers with donors receiving public recognition or nominal gifts in return. Until the JOBS Act it was illegal to solicit equity investments from a population of unqualified investors with less than $1 million in assets who were not friends or family – now it is possible. Though some feel this is a great way for small businesses who cannot attract VCs to succeed, there are many warnings as well.

For example, entrepreneurs who work with amateur investors will miss out on the advice, networking opportunities and tough love provided by VCs and angels, not to mention the stamp of approval a venture investment confers – which may help with future funding rounds that require the sums of money only available through larger VC investments. Also, this is seen as opening a funding spigot for companies the experts have already passed over. It only opens the door funding failures and potentially weakens investor protections. Other companies see this as a new business opportunity, allowing the companies that once gave funds and advice to just offer guidance to the small investors or startups.


  • Although the JOBS Act has now been promulgated into law, crowdfunding itself remains illegal.  We are currently in a holding period during which the SEC has been tasked with the duty of writing the rules and regulations that will govern crowdfunding and which will include preventative measures to minimize the risk of fraud and protect investors.

    For more information on this and other legal topics please visit http://www.LegalEsq.com.