Can I solicit investments using social media or crowdfunding?

Takeaway: Yes, you can with some limitations. Practically, it is usually easier to raise money on a SAFE from a smaller group of investors than it is to crowdfund. The crowdfunding process can be quite long and arduous and, by the time you’re done, you might wonder why you went down that path to begin with.

Startups are always looking for new ways to raise capital, and with the rise of social media and crowdfunding platforms, many founders wonder whether they can use these tools to solicit investments from the general public. The answer is: it depends.

In the United States, securities laws generally prohibit the public solicitation of investments in private companies (which startups are until their IPO), unless the securities are registered with the Securities and Exchange Commission (SEC) or the offering qualifies for an exemption from registration. Registering securities with the SEC is a very time intensive effort and is generally not advised for startups. Instead startups are advised to find exemptions from the SEC’s registration requirements that fit the securities they want to sell.

In general, sales of securities by startups to the general public using social media or crowdfunding will be classified by the SEC as “general solicitations,” which are prohibited by law without going through the lengthy and expensive registration process. Startups that want to use social media or crowdfunding to raise funds must ensure that their offering complies with applicable securities laws and regulations.

One option for startups is to use Regulation Crowdfunding, which is an exemption from the SEC’s registration requirements that allows companies to raise up to $5 million in a 12-month period from a large number of investors, subject to certain restrictions and requirements. Another exemption that startups can use is Regulation A+, which allows companies to raise up to $75 million from both accredited and non-accredited investors, but requires more extensive disclosures and regulatory compliance.

Startups should also be aware that even if they are using a crowdfunding platform, they are still responsible for ensuring that they comply with all applicable securities laws and regulations. This includes providing investors with all necessary disclosures, following any applicable state and federal regulations, and ensuring that the offering does not violate any anti-fraud rules.

In summary, startups can use social media and crowdfunding to raise capital, but must ensure that they comply with all applicable securities laws and regulations. I typically counsel startups that crowdfunding should be very low on the list of funding sources they pursue due to the burden of complying with securities regulation. In practice, startups that offer securities on crowdfunding platforms are usually required by the platform to jump through quite burdensome hurdles in order to list their company. It is important for startups to consult with experienced securities counsel to ensure that their offering is structured properly and that they are in compliance with all relevant securities laws.