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In recent times, a significant amount of business is conducted online.  The Internet connects a business to customers anywhere in the world. What happens when a dispute arises between a business in one state and a customer in another? If the customer wants to bring legal action against the business because of a transaction that occurred online, where does the customer file the action? The answer may depend on the type of website. The courts have created the distinction between active and passive websites. When a transaction occurs through an interactive website, the business may be subject to the jurisdiction of the state where the customer accessed it. Is your business developing a website? Did you know that an interactive website may subject you to the jurisdiction of any state? If so, then you must understand the difference between active and passive websites, and how they may affect your legal rights.

What Is the Active and Passive Distinction?

An interactive or active website is one where business transactions can occur through the website or information can be exchanged to solicit business. On the other hand, a passive website is one that is used to post information for potential customers, but it does not allow for interaction. A passive website is similar to an advertisement. The distinction is crucial because courts will confer personal jurisdiction over companies that maintain active websites in the state where the consumer is located. Active websites include sites that foster online sales, sites that take measures to solicit business in a particular forum, and the use of a third-party site to sell an item. Not every website fits neatly into these two categories, and issues arise when the website falls between the two.

How Do Courts Decide Whether A Website Is Active Or Passive?

In general, the courts look to a number of factors when deciding whether a website is active or passive. A federal court in Virginia held that an active website did not confer personal jurisdiction in Virginia because the website was not directed toward Virginia and no Virginia residents visited the site. On the other hand, another federal court in Connecticut held that a site that seemed passive did confer personal jurisdiction on the company because of a toll-free number posted on the website. The court held that the number was enough to be a solicitation. While many courts apply the “active/passive” test, not all rely on it exclusively. The Second Circuit has stated, “a website’s interactivity may be useful for analyzing personal jurisdiction,” but “traditional statutory and constitutional principles remain the touchstone of the inquiry.” The general test for personal jurisdiction is whether the defendant has minimum contacts with the state in question. Courts apply the minimum contacts test on a case-by-case basis. To apply this test to a website, a court would look to the “quality and nature” of the site’s activity and whether that activity is such that it would be fair to hale the defendant into that jurisdiction.

If you plan on doing business online, then you must be aware of whether your website is active or passive. The distinction could be the difference of you being summoned into court on the other side of the country. If you are concerned about the interactivity of your website, you may contact us to speak to attorney.

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Since the 1930s, the act of publicly raising money for a startup business has been outlawed. Now, with the implementation of the Jumpstart Our Business Startups Act (“JOBS Act”), in 2012, public crowdfunding is legal and encouraged. Startup companies are no longer confined in the resources and opportunities available to raise capital. Private companies can now publicly advertise that they are raising capital and collect investment funds through online crowdfunding services. The JOBS Act allows for two different ways in which a company can utilize this new crowdfunding opportunity. Is your startup looking for an infusion of capital? Are you considering crowdfunding as an option? If so, then you must understand how Title II and Title III of the JOBS Act apply to your startup.

What is Title II?

Title II of the JOBS Act now allows a private company to solicit and advertise investment opportunities to the general public. But, Congress left it up to the Securities and Exchange Commission (“SEC”) to regulate the rules. The SEC has changed Rule 506 of the Securities Act of 1933 to allow for this new public advertising provided that, “the issuer takes reasonable steps to verify that the investors are accredited investors.” Rule 501 defines accredited investor in three different ways: (1) an individual whose net worth or joint net worth with a spouse exceeds $1 million; (2) an individual with an annual income more than $200,000; or (3) a joint annual income with a spouse over $300,000. In addition, issuers must previously file with the SEC that they are claiming this new public solicitation exemption. The penalty for not following these requirements is being banned from fundraising for a year.

What is Title III?

Title III of the JOBS Act will remove the accredited investor requirement under Title II, but will add new red tape. Non-accredited investors with an income below $100,000 can invest a maximum of $2,000 or 5% of their income or net worth. Non-accredited investors with an income above $100,000 can invest a maximum of 10% of their income or net worth. Further, investments made under Title III cannot be resold for at least one year. Issuers must use the services of a broker or a “funding portal” registered with the SEC. A funding portal is a neutral third-party service (e.g., Kickstarter, Indiegogo). There are also limitations on companies raising funds under Title III. Companies are limited to $1 million a year in fundraising when using the Title III exemption. There are also many required disclosures to the SEC. You must disclose financial statements and tax returns, or be audited by an independent public accountant or auditor. Companies must disclose information about executives and any individuals who own more than 20% of the organization. Further, companies must disclose the use of all proceeds, price of the securities offered to the public, target offering amount, timetable for reaching the target amount, and any excess acquired above the target amount. Finally, companies raising money under Title III must file an annual report with the SEC. While Title III allows for a larger pool of investors, the disclosure requirements may be so cumbersome that the costs outweigh the benefits if you are not aware of all the requirements.

As such, the JOBS Act seems to provide new opportunities for private startups to gain capital, but they must pass through certain bureaucracies. You may contact us to discuss how you can utilize the provisions of the JOBS Act to raise capital for your startup.

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In recent years, social media has allowed users to instantly communicate with each other. Social media also provides a low cost and high-yield forum for communications. Because of these effects, social media is becoming the preferred way for advertisers to reach customers. A marketing campaign that includes social media can greatly enhance a company’s brand exposure.  However, there are several legal and regulatory issues that arise when using social media for advertising. When using social media tools like hashtags and facebook pages, advertisers should monitor their copyrights and trademarks and comply with state and federal regulations.  Is your company beginning a new social media advertising campaign? Are you trying to brand your company with hashtags and handles?  If so, then you should contact us to discuss the legal issues.

What is a Hashtag and How Is It Used in Advertising?

A hashtag is a form of metadata made up of a word or phrase that is prefixed with the symbol “#” used by a social media site to create a searchable keyword. Hashtags are commonly used to direct potential customers to others discussing the same hashtag. Any user could create a hashtag with your company’s name or one that infringes on your intellectual property. Most social networks have policies that prohibit trademark and copyright infringement. Be sure to check these policies and the procedures for reporting abuses. Yet, not every third-party use of a trademark is necessarily an infringement if done under the fair-use standard. If a third-party is using a hashtag or handle that refers to your trademark, it may not be an infringement if used only to join a conversation, and that user is not claiming to be the owner of the trademark. Further, you can actually trademark a hashtag with the United States Patent and Trademark Office for additional protection. A mark including the “#” symbol can be registered as a trademark if it functions as an identifier of a good or service.

What Are the Regulatory Issues for Social Media Advertising?

The Federal Trade Commission (“FTC”) enforces consumer protection laws to ensure that companies advertise their goods and services truthfully.  General rules of advertising law apply to social media advertising.  The FTC has provided several points to ensure that your advertisement is in compliance.  First, make sure that the advertisement is not unfair or deceptive.  In other words, all facts and practices used to advertise your good or service must be straightforward.  Second, advertisers should include qualifying information rather than a separate disclosure. For example, if you are posting on your Facebook page, any qualifying information about the promotion or offer should be included in that post.  Third, all required disclosures must be clear and conspicuous.  If you cannot include the disclosure in your post, then make sure to provide a clearly posted link to the required disclosure.  Lastly, if the forum does not provide the opportunity for a required disclosure, then do not advertise within that forum.  Social media is usually just one part of an advertising campaign, so advertisements that do not conform should be placed elsewhere.

Social media is a great tool in your advertising toolbox. If you need assistance in understanding the legal and regulatory issues involved, you may contact us to speak with an attorney.

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It seems that entrepreneurs do not simply want to capitalize on local markets anymore.  An international impact is achievable with the connections available through internet and technology (e.g., e-commerce).  A startup company can now achieve that international presence by utilizing cryptocurrencies and crypto-crowdfunding.  Using cryptocurrencies allows a company to do business in any country without worrying about foreign exchange fees or limitations.  Crypto-crowdfunding can help a new company raise capital by creating its own currency in exchange for real money or other cryptocurrency. Are you starting an online business and want an international presence? Do you want to raise money fast for your new company? If so, then cryptocurrencies and crypto-crowdfunding may be helpful.

What is Cryptocurrency?

Cryptocurrency is digital or virtual currency that uses cryptography as its security. These currencies are not issued by central banks, and therefore, immune from government intervention and manipulation. Because there is no government intervention into these crypto-markets, many national cyrptocurrencies are beginning to emerge. European countries with struggling central banks and economies are experiencing the emergence of national cryptcurrencies, such as Spaincoin in Spain and Aphroditecoin in Cyprus. These currencies are easily traded and provide entrepreneurs with the ability to circumvent foreign exchange controls. Whether these currencies are privately started or nationally motivated, they can connect people anywhere in the world while keeping governments out of the picture.

What is Crypto-Crowdfunding?

Crypto-crowdfunding combines the benefits of cryptocurrencies and the quick capital infusion from crowdfunding. One of the first entities to foster this idea is Swarm.  The process works by a startup company creating its own cryptocurrency. The new company then trades this currency for real money or other cryptocurrencies. If the company is popular or successful, then its newly created currency is more valuable and can be traded to a third-party for a profit. The company benefits because it receives fast capital in many forms, and those who purchase the new cryptocurrency also have a share in the success of the company because they own its currency.

What Are the Legal Issues of Crypto-Markets?

In general, governmental agencies participate in the regulation of these markets—e.g., Financial Crimes Enforcement Network (“FinCEN”), Securities and Exchange Commission (“SEC”), and Internal Revenue Service (“IRS”).  Cryptocurrencies provide an opportunity for money laundering, and FinCEN has announced that anti-money laundering regulations apply to virtual currencies. Under FinCEN guidelines, an exchange service that allows a user to buy a cryptocurrency with real currency and sell cryptocurrency for real currency must register with FinCEN. A federal court held in SEC v. Shavers that cryptocurrency is a type of security covered by the Securities Act of 1933. Therefore, fraudulent trades in the crypto-markets come under the regulatory control of the SEC. On March 26, 2014, the IRS issued the IRS Virtual Currency Guidance to explain the tax obligations of cryptocurrency. The IRS has stated that “virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.” So, using cryptocurrency may help a new company avoid capital gains tax obligations.

As such, these markets are still in development, and the regulatory agencies and laws are not always up-to-date. You may contact us to discuss the applicable laws and regulations.

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In the past, to start a business you had to find a location, rent space, and open your doors to the public. Today, many entrepreneurs can do it all online by advertising, communicating with customers, and managing transactions using the web. Many entrepreneurs are interested in starting a new business with a strong online presence. There are several steps that one must take to start a business, plus additional considerations to comply with online business laws. Are you ready to create an online business? Are you unsure which laws you need to be aware of for your e-commerce website?  If so, then you need to know the process to start a business and the additional issues that apply to e-commerce.

How Do I Start An Online Business?

The Small Business Administration recommends a ten-step process to start a new business.  First, write a business plan.  This is your general outline as to the identity of your new company and the structure you are going to build to execute your plan.  Second, get the proper assistance and training. No one knows everything and connecting with mentors and experts can help you get off on the right foot.  Third, choose your location. If your company is 100% online, you still need to determine the types of customers you plan on attracting and to what areas you plan on making deliveries.  Fourth, finance your business. Whether you choose traditional financing from a commercial bank or more creative methods (e.g., crowdfunding), make sure to do your research and figure out what works for your company.  Fifth, determine the legal structure of your business. There are many types of entities you can create (e.g., LLC or Corporation). Each entity creates different levels of liability and tax obligations.  Sixth, register your business name with the proper state agency (e.g., Secretary of State).  Seventh, get a tax identification number (a/k/a EIN) by registering with the Internal Revenue Service.  Eighth, register with state and local tax agencies (e.g., Franchise Tax Board, a/k/a FTB). In general, each state has its own tax laws, so make sure you know the obligations within your state.  Ninth, obtain business licenses and permits.  You should keep in mind that state and federal agencies may require different licenses and permits. Finally, you may need to hire employees or independent contractors.

What Are Other Concerns For An Online Business?

Doing business online may relieve you of the worries of a physical location, but there are additional considerations. The privacy of your customers should be a major concern. The Electronic Communications Privacy Act (“ECPA”) and the Stored Communications Act (“SCA”) protect privacy of electronic communications and electronically stored information.  For example, your website may access a customer’s computer to complete a transaction, but there could be criminal and/or civil penalties under the ECPA or SCA if your company accesses protected information.  In addition, some information (e.g., personally identifiable information) you receive from your customers must be protected and securely stored on the network.  In fact, new businesses should focus on cybersecurity.  Furthermore, no security system is full proof. Therefore, cybersecurity insurance is another protective measure businesses may want to consider in order to minimize liability.  If you need assistance in starting your new business and complying with applicable state or federal laws, you may contact us to speak with an attorney.

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As mobile technology improves, we all do more on our mobile devices—e.g., banking, shopping, and gaming are just a few examples.  The Wall Street Journal estimates the mobile apps market as a $25 billion industry.  New businesses and entrepreneurs may want to jump into this growing market. When new developers enter the market they must consider the privacy rights of users.  The law protects consumers and their privacy from intrusion, and there are even stricter guidelines for apps used by children.  Are you interested in starting a mobile app business?  Are you ready to begin marketing your new mobile app?  If so, then there are steps you must take to ensure you are in compliance with the law and respecting the privacy rights of your customers.

What Is a Mobile Application?

A mobile application is software that can be downloaded and accessed using a mobile device, such as a smartphone or tablet. Apps can be paid or free.  Developers of free apps usually make a profit through advertisements, in-app purchases, and/or paid versions that offer more features than a free trial or “lite” version. Further, apps may collect data from the user.  Apps can access a user’s contacts, call logs, internet data, calendar, and device location.  Usually, this data is collected so that the app can perform what it is designed to do, such as make a bank transfer or direct the user to a destination through GPS.  Data collection must conform to consumer protection guidelines and developers will be held responsible to those guidelines.

What Do Developers Need To Know?

The Federal Trade Commission (“FTC”) has recently released a comprehensive video to help developers comply with the legal rights of consumers when developing and marketing mobile applications.  The FTC enforces the federal Truth In Advertising laws, which apply to advertisements.  An advertisement is any communication about a product to consumers.  This could be a description within the app or an online app store description.  The FTC requires that a developer tell the truth about his app in any of these descriptions.  Any data an app collects or utilizes must be clearly disclosed to the user.  The law requires that this information be presented clearly and conspicuously. Developers should consider these privacy concerns when they first begin development on a new app. From the beginning of the design phase, the information collected should be limited, securely stored, and any unneeded data disposed of safely.  To be safe, the app should ask for express permission for any data collected or used. Developers should be transparent about any data collected and what it will be used for. The Children’s Online Privacy Protection Act (“COPPA”) requires that app developers comply with additional security requirements when the app is directed at children under 13, or developers have actual knowledge that children under 13 will be using the app.  It requires that developers post clear privacy policies, obtain parental consent, and provide parents access to their child’s information.  This federal law also requires that information collected be stored confidentially and securely only as long as necessary for the app to function.  The market for new mobile apps is booming, and developers must take the proper steps to ensure they are in compliance with consumer privacy laws.

You may contact us to speak to attorney about your new mobile app and its compliance with consumer privacy laws.

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Today, most companies are dependent on technology and their computer systems, and there are entities whose primary focus is to hack into these systems. On the other hand, a company might experience an internal breach of its network system, which causes the unauthorized release of sensitive information. Any breach into or out of these systems could be catastrophic. The computer network for a company may contain important data, intellectual property, and consumer information. All industries are susceptible to a data breach. To help protect against these risks, companies must insure themselves with the correct policy. Traditional insurance policies may not be enough to cover all the risks. In recent years, insurance companies have begun to issue specific cybersecurity policies. What kinds of claims are covered under these cybersecurity insurance policies? How can an insurance company ensure that it is mitigating its own risks in underwriting a cyber policy? If you are concerned with these questions, then the effectiveness and scope of these cybersecurity policies is relevant to your company.

What Is Cybersecurity Insurance?

Cybersecurity insurance is an insurance policy that helps mitigate the risks posed by incidents such as “data breaches, business interruptions, and network damages.” The market for this kind of policy is still in development, and insurance companies and consumers are unsure how far reaching the policy protections are. Department of Homeland Security has stated that a more developed cybersecurity insurance market would lead to fewer successful cyber attacks—i.e., by implementing preventive measures in conjunction with policies and lowering premium prices based on the level self-protection. There are steps that companies and individuals can take to reduce their risk level to a cyber attack, and these steps may actually help prevent attacks. Preventive measures can at least lower the risk an insurance company must take in underwriting a cyber policy.

Why Do We Need Specialized Policies?

Traditional or general liability policies may not cover all the risks of a cyber attack or network breach. In the past, it may have been unclear whether these types of policies covered cyber risks.  For example, in Eyeblaster, Inc. v. Federal Insurance Co., a federal court held that an insurance company was liable for data breaches under general liability and error and omissions policies. But, another federal court in America Online Inc. v. St. Paul Mercury Insurance Co., held that an insurance company was not liable for software that caused damage to consumer computers. Therefore, insurance companies must make it clear that traditional insurance policies do not cover cyber risks and instead direct their customers to a tailored cyber policy. Insurance companies must communicate clearly to their customers what is included in a cybersecurity policy because there are so many scenarios wherein a breach can occur. They should also disclose what type of data is covered—i.e., whether it is consumer data or trade secrets stored on computer networks. Also, a policy may cover external breaches into a network and/or internal mistakes that release sensitive information. The market for cybersecurity insurance is new, but growing and the legal protections for consumers and insurance companies are not always clear.

You may contact us to speak to an attorney regarding cybersecurity breaches and related issues.

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In recent years, every aspect of our lives has become dominated by technology—and now people are beginning to wear their technology. For example, Google has released Google Glass, a wearable computer in the form of glasses. Samsung has released the Galaxy Gear smart watch, a device that one wears as a watch and functions as a phone. This new technology is creating a class of its own—“wearable technology” or “wearable computing.”  By utilizing this technology, a person can walk on the street wearing glasses or a watch while recording the images and sounds around him. Are you concerned with being recorded without notice? Do you want a person to be able to gather your personal information in an instant with facial recognition software? If these issues concern you, then wearable computing is relevant to your privacy rights.

What is Wearable Computing?

Wearable computing describes a class of computer-powered devices that can be worn by a user. There are many kinds of wearable computing devices, and some raise few concerns because they are as simple as a step counter or a heart rate monitor. Other devices can perform the same functions as a smartphone, but in a much more discrete manner. The more advanced wearable devices can take pictures, record video and sound, and respond to voice commands to read text messages, emails, and surf the web. Probably the most well-known and discussed technology, Google Glass, has been subject to criticism. If someone wears a Google Glass and looks at you, your first thought might be that you are being recorded or investigated.  In fact, some restaurants and bars in San Francisco have already banned this device because of their customers’ privacy concerns. Even with the concerns over privacy, this technology is likely to become even more pervasive.

What are the Legal Issues Associated With Wearable Technology?

Facial recognition software raises one of the most important privacy concerns. Apps such as NameTag can match a person’s picture against a database to gather personal information. If a device like Google Glass has an app like this installed, then a user could obtain another person’s information quickly.   However, the one thing the average person has on his side is that these databases still need to be created.  Facebook and Twitter already manage massive databases of personal information and they are required to work with the Federal Trade Commission (FTC) to conform to its privacy policies. It is possible that NameTag would also be required to cooperate with the FTC. What about wearing these devices while driving? In California, Vehicle Code Section 27602 makes it illegal to drive while operating a video screen except for GPS and navigation systems. A device like Google Glass would fall into this category. But, is it not safer to drive with a hands-free, voice-controlled device like Google Glass than looking down at a navigation map or smartphone for directions? In general, state laws are not up-to-date when it comes to new technologies.

You may contact us to speak to an attorney about how wearable technology and computing may affect your privacy rights.

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Computers are learning to do it all—even surf the Web. These computers, or programs, explore the World Wide Web, gathering information and processes for use in other forums. This technology, which is known as “web scraping” may also threaten website and consumer privacy concerns. Indeed, websites have a proprietary interest in their content and others are not authorized to access and reuse this information. Consumer information that is available online is not necessarily available for any use.  As such, web scraping has become a concern as regulators attempt to outline the parameters. Do you operate a website? Are you a consumer with personal information available over the Internet—such as your name, address, salary, or work history?  Do you have an interest in gathering information from various sites for your personal use? Do you wish to revise your terms of service in light of these advancements? If so, web scraping is relevant to your business and privacy concerns.

What Is Web Scraping?

Web scraping is the process of using computer software to extract information from websites. Usually, this type of software simulates web browsing that is performed by a human. This technique is used to automatically gather information from various websites. This is an effective tool in several fields such as online price comparisons. Often, the aggregate website will have agreements with other websites allowing web scraping to gather pricing data. Additionally, web developers often use this technique to copy website content and reuse it when designing a new site. However, this process can also be used in ways that press against privacy concerns. For example, web scraping can be used to gather a consumer’s personal information. This includes contact information, personal websites, and professional histories. Web scraping can also gather an online user’s comments on discussion boards. All such information is valuable to businesses that want to know how consumers feel about their products or services. Web scraping has increased drastically over the last few years. In 2013, web scraping made up 23% of all online browsing traffic.

What Are The Legal Issues Associated With Web Scraping?

Until 2000, it was generally unclear whether web scraping is legal. Then, eBay filed an injunction against Bidder’s Edge to stop the online auction site from using a web crawler to gather information from eBay’s website. In eBay, Inc. v. Bidder’s Edge, Inc., eBay’s successful effort drew attention to the potential legal implications of web scraping.  Now, many websites will state, in their terms of service, that web scraping is not permitted on their site. Although, continued web scraping may not qualify as a criminal offense, websites can still seek legal remedies to stop web scraping that is in violation of their terms of service. Indeed, some websites install services to prevent web scraping entirely—such as requiring users to duplicate a combination of distorted letters, numbers, and symbols (a/k/a “Captchas”) before accessing the site to ensure the user is human. Until the law in this area becomes clearer, websites can save the time and effort of filing a lawsuit in the future by taking preventive steps against web scraping.

You may contact us to speak with an attorney about how web scraping may affect your online operations or how you can better prepare for the technology.

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Companies, old and new, now have the opportunity to raise funds through a unique technique—crowdfunding. Although, this is a twist on the traditional investment model, crowdfunding allows companies and individuals to fund their new ideas and business ventures by seeking investments from the general public. This unconventional approach to the well-known investment structure allows new business to gain financial support. Do you have a new idea that you would like to fundraise? Are you a company that would like to launch a new product? Do you need financial support to help propel your latest venture? If so, then crowdfunding may help your entrepreneurial efforts.

What Is Crowdfunding?

Crowdfunding is the practice of fundraising a new company, idea, project, or venture through large numbers of people. These people typically donate small amounts that add up in the aggregate. Unlike the investment structure that appeals to traditional investors, the general public fundraises projects. Crowdfunding has begun to gain momentum and exposure after the passage of the Jumpstart Our Business Startups (“JOBS”) Act. This law was passed to help small businesses and entrepreneurs jumpstart their business. Both private and public companies may take advantage of this capital-raising model. Crowdfunding is unique because although it does allow for a company to use outside resources to fund a project, however, the company does not have to make an initial public offering, register as a public company, or meet the requirements of a traditional publicly-traded company. Also, unlike a public company, which receives outside investments on an on-going basis, crowdfunding efforts are limited in time. That is, they may not continue forever. An entity must raise its goal amount by a specified end date. Otherwise, the company must offer to return all investments made under that project.

What Are The Limitations To Crowdfunding?

As with all other financial efforts, a government agency regulates the process. In this case, the Securities and Exchange Commission (“SEC”) defines the parameters of crowdfunding. Currently, the JOBS Act and the SEC proposed crowdfunding rules provide some guidance for crowdfunding. First, companies cannot raise more than $1 million during any single year. Companies that require more funds to startup will need to turn to other fundraising efforts for the remainder of the capital. This is limiting because companies will often skip over crowdfunding and turn to the other fundraising techniques. There are also very stringent disclosure requirements that companies must abide by before they raise funds. Satisfying all of these requirements is a costly endeavor for any company, but especially a company that is new and does not have the capital. Additionally, crowdfunding appeals to the common consumer and not necessarily to the experienced investor. Therefore, there are strict regulations in place to ensure that crowdfunders properly educate potential investors about the parameters of their project. These regulations aim to protect the investors if the project does not become successful. Ultimately, in the face of an entirely new form of investment structure, these regulations hope to protect the parties.

You may contact us to speak with an attorney about how this innovative investment tool may help with your next fundraising or startup efforts.