The Secrets of Effective Donating: What to Do and What to Avoid
Tags :
Blogs
Share This :
What You Need to Know to Stay Compliant in Your Crowdfunding Campaigns
October 14, 2023
Crowdfunding is a popular and effective way to raise funds for your business, project, or cause. However, it also comes with some legal and regulatory challenges that you must be aware of and comply with.
The main reason for staying compliant is that it can affect your reputation, your legal liability, and your tax obligations. so, in this blog post, we will provide guidance on navigating the regulatory maze of crowdfunding, including tax implications, reporting requirements, and transparency measures.
What is crowdfunding and how does it work?
Crowdfunding is a method of raising money from many people, usually through an online platform, to support a specific goal or project. There are different types of crowdfunding models, such as the following:
- Donation-based crowdfunding: this means that you’ll receive donations from supporters without offering anything in return.
- Reward-based crowdfunding: You offer rewards or perks to your backers in exchange for their contributions.
- Equity-based crowdfunding: means that you sell shares or ownership stakes in your company or project to your investors.
- Debt-based crowdfunding: You borrow money from your lenders and promise to pay them back with interest.
Each type of crowdfunding has its own advantages and disadvantages, as well as its own legal and regulatory implications. As a result, you need to choose the type of crowdfunding that best suits your needs and goals and understand the rules and risks involved.
Compliance factors to consider
To ensure your campaign is compliant with regulations, we recommend you to consider the following factors:
1. The type of crowdfunding you are using
As we mentioned before, there are different types of crowdfunding. Therefore, each type has its own legal and regulatory implications, depending on the jurisdiction where you are operating and where your backers are located.
For example, if you are using equity-based crowdfunding, you may need to register your offering with the Securities and Exchange Commission (SEC) or comply with an exemption, such as Regulation Crowdfunding, which allows eligible companies to raise up to $5 million in a 12-month period from non-accredited investors.
2. The tax implications of your campaign
Depending on the type of crowdfunding you are using and the amount of money you raise, you may have to pay taxes on your income or report it to the IRS. For example, if you are using donation-based crowdfunding, you may have to pay income tax on the donations you receive, unless they qualify as gifts or charitable contributions.
On the other hand, if you are using reward-based crowdfunding, you may have to pay sales tax on the rewards you deliver to your backers or collect and remit sales tax from them. If you are using equity-based or debt-based crowdfunding, you may have to pay capital gains tax on the profits you make from selling your shares or interest or report the interest payments you receive from your lenders.
3. The reporting requirements of your campaign
Depending on the type of crowdfunding and the platform you are using, you may have to report certain information to your backers, the platform, the SEC, or other regulators. For example, if you are using Regulation Crowdfunding, you have to disclose information about your company, your financial condition, your use of proceeds, and your risks in filings with the SEC and to investors and the intermediary facilitating the offering. You also have to provide ongoing reporting on an annual basis until you terminate your reporting obligations.
Additionally, if you are using a platform that is registered as a broker-dealer or a funding portal with the SEC, you have to comply with their rules and policies regarding communication, transparency, and record-keeping.
4. The transparency measures of your campaign
Transparency is essential for building trust and credibility with your backers and potential backers. You should be honest and clear about your goals, your progress, your challenges, and your risks. You should also communicate regularly with your backers and update them on any changes or developments that may affect your campaign, responding to their questions and feedback in a timely and respectful manner.
These are some of the main factors that you need to consider when launching a crowdfunding campaign. However, this is not an exhaustive list, and you should always consult with a professional advisor before starting a campaign especially because many of these factors depend on the jurisdiction your crowdfunding campaign will thrive in.
Crowdfunding can be a rewarding and successful way to raise funds for your business, project, or cause, but it also requires careful planning and compliance with regulations. We hope this article has given you some useful guidance on how to navigate the regulatory maze of crowdfunding and illuminate you on what to look after in order to be compliant with all regulations.