Traditionally, a new or expanding business could seek capital from borrowing money or seeking more traditional investors. In today’s digital age, Crowdfunding has become a viable source for new or expanding businesses seeking funds. According to the Securities Exchange Commission (SEC), “Crowdfunding generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people.”
If you are curious about Crowdfunding, you should be aware that it is regulated by the SEC. Depending on the net worth and income of an investor, their ability to contribute to your business is limited to between $2,200 and $107,000 within a twelve-month period.
Although there are a number of different Crowdfunding vehicles for raising money (either through offering equity or by loans), a promising method is through the use of a SAFE instrument. SAFE is an acronym for Simple Agreement for Future Equity. SAFEs were first created by Y Combinator. Essentially, it is an agreement between your company and an investor whereby the investor receives equity in your company in the event that a predetermined trigger occurs. Such triggers typically include the company achieving a certain valuation.
The primary benefits associated with a SAFE are that they provide an expedient way to raise money without complex negotiations and forms. SAFEs do not require interest to be paid and there is no requirement to provide equity unless the predetermined trigger is achieved by your company. Because SAFEs are not a loan, there is no maturity date and there are generally no issues with “lending” laws.
As no system is perfect, SAFEs do have risks. First, there can be concerns with determining a valuation of your business. This can lead to you granting out more equity than was originally anticipated, thereby devaluing the equity for you as an original “investor” in your business. Additionally, SAFEs have drawn the attention of the SEC. On May 9, 2017, the SEC issued an Investor Bulletin entitled “Be Cautious of SAFEs in Crowdfunding.” It is clear that the SEC has concerns that investors may not have a clear understanding of the trigger mechanism along with additional rights of potential equity holders.
Y Combinator has extensive information concerning SAFEs, along with some SAFE forms on its website, which you can find here. However, as with all legal documents, it is imperative that you have a sophisticated business attorney assist you with this process. SAFEs can be a valuable way to raise money. However, you should ensure that you are following both state law as well as federal law in utilizing a SAFE. Also, you should undertake action to protect yourself from potential liability from investors. Gordon Law is here to assist you with funding methods as well as all of your business needs.