Investor and Business Crowdfunding Considerations | RKL LLP
Posted on: August 15th, 2017

Key Considerations for Investors and Businesses Using Crowdfunding

Key Considerations for Investors and Businesses Using CrowdfundingKickstarter. GoFundMe. FunderHut. These are just a few of the many crowdfunding websites that have sprung up in recent years as businesses, organizations and individuals seek new ways to raise funds and find investors for personal or professional endeavors.

As online fundraising has evolved, so too have federal rules and processes aimed at regulating crowdfunding investments and protecting the investors and businesses that use them. Here are some important tax and financial considerations to keep in mind when using crowdfunding sites.

Personal online fundraising tax deductions

GoFundMe and similar small-scale fundraising pages are a variation of crowdfunding often used to solicit financial support for individuals experiencing tough times, like a medical emergency or recovering from a natural disaster.

While most personal GoFundMe pages are well-intentioned and used for a good cause, donors should be aware that these contributions are categorized as personal gifts and are not tax deductible. Donations made to GoFundMe pages linked to a nonprofit with a 501(c)(3) designation, however, are considered allowable tax deductions.

Sales of securities now permitted via crowdfunding

The federal Jumpstart Our Business Startups (JOBS) Act contained several provisions related to crowdfunding, many of which took effect in early 2016. In particular, Title III of the JOBS Act expanded access to crowdfunding to individuals and small businesses beyond the previous circle of accredited investors that met certain income or net worth thresholds.

Title III also permits small or early-stage businesses to issue or sell securities as part of its crowdfunding efforts to raise capital, as long as the business enlists the services of newly recognized type of intermediary known as a crowdfunding portal. The Financial Industry Regulatory Authority, or FINRA, maintains a list of crowdfunding portals registered with the SEC.

By creating these portals, Title III eases the filing burden on companies raising capital through crowdfunding. Now, companies are permitted to use a “Q and A” format for the required disclosures on their Form C fillings. Title III also shifts the responsibilities for fraud detection and investor education to the portals.

In addition to traditional compensation direct from the company, Title III now allows companies to offer portal funding intermediaries payment in the form of a small ownership percentage (provided the ownership rights are equivalent to those being offered).

Annual limits on company crowdfunding and individual investment

Title III permits companies to raise an aggregate $1 million over a 12-month period through the use of a registered broker-dealer or crowdfunding portal. Depending on the amount to be raised, companies seeking crowdfunding, also known as issuers, may be required to have GAAP basis financials statements either reviewed or audited by an independent CPA firm.

  • Amounts under $100,000 require presentation of internal financial statements.
  • Amounts between $100,000 and $500,000 require financial statements to be reviewed by an independent CPA firm.
  • Amounts between $500,001 and $1,000,000 require financial statements to be audited by an independent CPA firm.
    • Issuers offering more than $500,000 for the first time are given a one-time exemption from the audit requirement. Instead, these companies are permitted to have an independent CPA firm simply review their financial statements, as opposed to auditing them.

Since crowdfunding involves a unique risk, Title III also limits the amount individuals can invest in this type of offering over a 12-month period based on their annual income and net worth. According to the SEC, if an investor’s annual income or net worth is under $107,000, his investment is limited to $2,200 or five percent of the lesser of annual income or net worth, whichever is greater. Alternately, if both annual income or net worth is equal to or greater than $107,000, the investor’s limit is 10 percent of the lesser of annual income or net worth.

Companies interested in crowdfunding should reference the Title III section of the SEC’s JOBS Act resource center for full details on compliance and disclosure. RKL’s team of business advisors are available to help businesses assess the benefits of crowdfunding and adhere to all regulations. Contact one of our local offices today to get started.

D. Hunter Mink, CPA, CCIFP, manager in RKL's Audit Services GroupContributed by D. Hunter Mink, a manager in RKL’s Audit Services Group. Hunter is responsible for the planning and supervision of audit engagements for clients in various industries, including engineering, construction, manufacturing and distribution and higher education.

 

 

 

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