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Crowdfunding—What It Is and How You Can Benefit

July 24, 2012 | Legal Alert
Cherry Hill, NJ

The Internet has changed many things, and now it is about to change the way companies raise money.

Since the 1930s, a company that wanted to raise money from investors had two choices: go through a very long and expensive public offering of the kind Facebook completed recently; or conduct a private offering, a prominent feature of which was the inability to reach a large number of prospective investors.

The JOBS Act signed by President Obama offers a third choice, called “Crowdfunding.” In its simplest form, a company seeking capital will register with a special kind of Internet site created for this purpose, referred to in the law as a “portal.” Prospective investors will also register with the portal. If a registered investor likes a registered company then a marriage is made—all through the portal and all online.

Probably the most important change to the securities laws in 80 years, Crowdfunding offers rich new opportunities:

The Securities Exchange Commission (SEC) is writing the final rules for Crowdfunding right now. Here are some of the most important rules and limitations you should know:

Crowdfunding, and more generally, the ability to raise money through the Internet, is in its infancy. If Crowdfunding is the success that many expect, it seems very likely that these rules will be changed, allowing more money to be raised from additional investors in more ways. Surely, there will someday be an “app” for that.

There will be many traps along the way. To avoid the traps and discuss the opportunities, please contact a member of Flaster/Greenberg’s Business and Corporate Law Practice Group.

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