13 Jun Crowdfunding in the District of Columbia: Tips for Raising Capital in the DC
What do you do when you have a growing business but a limited cash flow? Crowdfunding can be a good way to start.
At inception, most businesses face the same problem – acquiring funding. Although some business owners are willing to fund their operations by taking on debt, banks are unlikely to offer loans at reasonable rates to small businesses in developing communities. So, what do you do when you have a growing business, but limited cash flow? One option is to turn to the crowd for financing. While most business owners recognize loans and grants, some are unfamiliar with crowdfunding. Crowdfunding generally consists of small contributions from many people who might be willing to invest in an idea, project, or business. Although crowdfunding can be as simple as a donation, there is a model of crowdfunding where businesses exchange equity—ownership interest in a company—for funding. By allowing investors to purchase equity in a company, business owners receive immediate funding and investors have a chance to recoup their initial investment plus profits if the business succeeds. The process of issuing and selling equity is referred to as security offerings.
Crowdfunding securities offerings can provide benefits for everyone involved; however, a company making security offerings may be required to spend a substantial amount of time and money registering and reporting security offerings to the state or federal government. Under federal and state laws, businesses making security offerings must register the security offerings unless the offering falls within a specific exemption. Businesses only offering to sell equity within the state where the business was created or for a total amount under $5,000,000, for example, are generally exempt from federal registration and reporting requirements. But, state regulations may still apply when businesses raise small amounts of capital within the state where the business was created. There are, however, registration exemptions in state regulations specifically aimed to promote crowdfunding. For example, the District of Columbia has enacted an exemption to facilitate small business development by marginalizing compliance cost for crowdfunding security offerings. Under this exemption, a DC company that operates principally in DC and issues security offerings exclusively to DC residents may not be required to register or report the offering to the District if:
- the offering is $10,000 or less for a single purchaser with an annual gross income less than $100,000;
- the offering is $25,000 or less for a single purchaser with an annual gross income less than $200,000; or
- the purchaser is a natural person or entity with an annual gross income worth more than $1,000,000.
To ensure that you are complying with federal and state laws, keep a detailed record of your company’s security offerings and consult an attorney with any questions. If your business falls into one of the above categories, you may be able to finance your company’s growth using crowdfunding without incurring expensive compliance fees. Although qualifying businesses are not required to register their security offerings, they may be required to make filings and take other steps to take advantage of this exemption. To find out more about the rules governing crowdfunding in DC, visit disb.dc.gov.