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Crowdfunding Law

crowdfunding law

The Regulation CF crowdfunding offering must take place on the intermediary’s platform. Other than the notice of the crowdfunding offering, advertising the offering outside of the platform is prohibited. If you suddenly embark on a public relations campaign that coincides with your crowdfunding offering, investor plaintiffs may argue that information that you publish outside of the intermediary’s platform close in time or during your crowdfunding offering constitutes “advertising” the offering.
What type of campaign can you undertake to promote your company or its product or service shortly before or during your crowdfunding offering?
The legal issue is whether communications by an issuer constitute an “offer” or impermissible conditioning of the market. In the Crowdfunding Release, the SEC notes that it has interpreted the term “offer” broadly, explaining “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer…”

The SEC notes in the Crowdfunding Release that Securities Act Rule 169 permits issuers that are not publicly reporting companies (i.e., do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) that are engaged in an initial public offering to continue to publish, subject to certain exclusions and conditions, regularly released factual business information that is intended for use by persons other than in their capacity as investors. The Crowdfunding Release states that whether a communication is limited to factual business information depends on the facts and circumstances of that particular communication, but that issuers conducting crowdfunding offerings under Regulation CF may generally look to Rule 169 for guidance.

If, prior to your Regulation CF crowdfunding campaign, you have not regularly published information on your website or otherwise publicly discussed your company or its products through a press release, for example, you must be careful if you publish information immediately before and during your crowdfunding campaign. You should not promote your company, product or service in a manner or with such frequency that is inconsistent with the manner or frequency with which you promoted such information prior to your crowdfunding offering. Thus, it may be helpful to establish your public relations practice in advance of commencing your crowdfunding offering if you plan to disseminate company information during the offering period.

If you have not established a public relations practice, any promotional campaign that you conduct at the time of your crowdfunding campaign may be closely scrutinized by the SEC or by private litigants, so seek the advice of experience legal counsel about such communications.

Many business owners might not suspect it, when the Internal Revenue Service (IRS) conducts business audits, it doesn’t just examine your business — it puts the owner under the microscope as well. Unsuspecting business owners can get caught in uncomfortable situations during audits where they end up having to justify their personal as well as their business expenses.

Crowdfunding and the IRS

Here are some of the most common things that IRS agents are trained to look for during business and personal audits.

Does your lifestyle match your income: If your tax returns report little income and a lot of deductions, yet you drive a really nice car and wear fancy clothes, IRS agents will dig deeper. The bottom line is, if your tax return doesn’t seem to match up with your lifestyle, expect to get a lot of questions about your personal expenses.

Do you claim a lot of personal entertainment expenses as business expenses: A lot of small business owners fudge on mixed personal and business expenses, and the IRS knows this. If you’ve claimed a significant amount of entertainment, meals or vacation costs as business expenses, expect the IRS to be extremely skeptical. Just saying you took someone out to dinner for business doesn’t cut it. The IRS will want some sort of documentation corroborating that the excursion was indeed business-related.

Do you have a lot of auto expenses: Many small business owners only have one car that they use for both personal and business trips. If you claim a lot of auto expenses as business-related, you’d better be able to back it up with mileage logs and receipts.

Do you have a lot of miscellaneous expenses: When you are filing your taxes each year, it’s best to avoid listing expenses as miscellaneous if possible. A significant amount of miscellaneous expenses is a red flag for the IRS because it indicates that either you keep poor records, you are sloppy, or you are hiding something.

Does your business handle a lot of cash: If your business is largely cash driven, IRS agents are taught to assume that you are skimming or diverting money into your own pocket. Again, the better your receipts and logs are, the better off you’ll be.

Does your business use independent contractors: Many businesses hire what they call “independent contractors” to avoid paying payroll taxes, but those independent contractors are really employees. Expect extensive questioning about the role of these employees: who they answer to, who directs them, how much freedom they have, etc. If the IRS decides that your independent contractors are really employees, you will get hit with some serious back taxes and penalties.

Did you fail to report some business income: if an IRS agent gets the impression that you simply “forgot” to report certain items as income (usually $10,000 or more), then you might be in very serious trouble. Purposefully not reporting income is criminal, and the IRS maintains a special criminal team that it uses during audits. If this ever happens, hire a specialist in tax audits immediately, remove yourself from the process and let the audit take its course.

Do your payroll taxes match your reported employees: If you are using employees rather than independent contractors, make sure that their payroll taxes are complete and accurate – the IRS will be double checking your payroll taxes to ensure that they match your claimed employees.

Crowdfunding Lawyer Free Consultation

When you need legal help with crowdfunding, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506