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4 Crowdfunding Cautions for Small Businesses

Stocks in this article: NEWT

On a positive note, companies and their owners will likely learn "what they need to do in order to raise capital," Kerrigan says.

"You have to be ready to go on these platforms in terms of disclosing financials. You also have got to have your act together in business plan viability in the marketplace. There are a lot of things that you're going to have to disclose and share to these investors. You can't expect to just throw something out there and say ... fund me," Kerrigan says.

As part of the last-minute investor protections added to the JOBS Act in the Senate, companies using crowdfunding methods "must still file some basic information with the SEC , including the names of directors, officers and holders of more than 20% of the company's shares, plus a description of the business and its financial condition," according to The New York Times.

Companies will also need to be aware of the applicable disclosure requirements, which will depend on how much money they are seeking.

For an issuer seeking to raise up to $100,000, they will have to provide tax returns and financial statements certified by the company's principal. For those seeking up to $500,000, they will have to file financial statements approved by an independent CPA. For issuers seeking to raise more than $500,000, they will need fully-audited financial statements, says Barry Sloane, chairman and CEO of Newtek Business Services (NEWT).

"The companies that are seeking to raise money, they better be sure that this information is accurate," Sloane says.

Companies will also have to consider how much control do they ultimately want to give up? Investor accountability will be of the utmost importance. At minimum, the process will be rigorous and time consuming.

"Entrepreneurs and small business owners will quickly find out if they are crowdfunding-ready when they enter these platforms," the SBE Council's Kerrigan says. "Having investors carries added responsibilities -- it's not just your business anymore."

A third issue to consider: Crowdfunding is a not a panacea to small-business financing. Just because you put your business on a crowdfunding site, doesn't mean that investors will want to back it. The business needs to be sound, experts say.

Another issue is the investors themselves. There is the now the potential for unsophisticated investors to get in on something they may think is an opportunity.

"If you get a bunch of people who don't really understand your business that could be a huge problem," Lendio's Blake says.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to:

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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