Reward-Based Crowdfunding Can Result in Legal Problems for Entrepreneurs

 Posted on May 17, 2019 in DuPage County Business Law Attorney

One of the countless ways the internet has changed the business world is through the introduction of online crowdfunding. Through websites like Kickstarter and IndieGoGo, entrepreneurs can obtain the capital they need to begin businesses and create products. These websites are referred to as “reward-based crowdfunding” because there is generally an incentive for people to invest in the various projects. Funders may receive the actual product being developed or other benefits in exchange for their investment. Although raising capital in this manner has been wildly successful for some entrepreneurs, others have found themselves in legal trouble after becoming involved in a crowdfunding campaign.

You May Be Entering into a Contract Unknowingly

Because crowdfunding is relatively new, the legal ramifications of failed crowdfunded projects are not completely understood. Recent lawsuits against some entrepreneurs who used crowdfunding to gain resources prove that crowdfunding is not a perfect solution for those lacking start-up funds. If you wish to use crowdfunding to finance your project or business, it is vital that you understand the risks that should be avoided.

When an individual agrees to take money from people in exchange for certain benefits, he or she is likely entering into a contract with the funders. If you are not careful with the language you use to inform investors of your offer, you could be creating a contract without even realizing it. This means that when investors do not receive the benefits that they were promised, they can file a breach of contract claim against you. Forming an LLC is one way that you can help protect yourself from potential personal liability if your intended project fails.

False Advertising and Consumer Protection Laws

Those who wish to use crowdfunding must also be careful not to overpromise what their funders will receive or what the project objective is. Misleading language or incorrectly describing your project can make you vulnerable to claims of false advertising, negligent misrepresentation, and fraud. You can also be held accountable for under-delivering on your promises under consumer protection laws. It is essential that anyone using reward-based crowdfunding avoids misrepresenting both the project/product itself as well as the benefits investors will enjoy. Not only can claims be brought against you by funders, but claims can also be filed by governmental agencies.

Tax Implications of Crowdfunded Projects

Many people using websites like Kickstarter do not realize that the money they receive is taxable income. If you create a rewards-based campaign, you will be required to pay taxes on the money you take in from investors. Many entrepreneurs using crowdfunding to finance their project make the mistake of forgetting about this significant expense. It is crucial that anyone using a reward-based funding system consider the taxes that they will have to pay when creating the project budget.

Contact a Glen Ellyn Business Lawyer for Help

For sound legal guidance on a number of business concerns, contact the business law professionals at Stock, Carlson & Asso. LLC. Speak with a knowledgeable Wheaton, Illinois business law attorney by calling 630-665-2500.

Sources:

https://www.thebalancesmb.com/crowdfunding-legal-issues-for-small-businesses-398020

https://www.msn.com/en-us/news/technology/crowdfunding-is-a-popular-way-to-raise-money-just-dont-count-on-getting-a-refund-if-something-goes-wrong/ar-BBVX9FT