NYC Restaurant Crowdfunding Popular, But Legal Considerations Abound

In years past, opening a new restaurant or expanding an existing operation required the approval stamp of a major bank willing to extend the loan. Our New York City restaurant lawyers know that in recent years, that is not as often the case, as crowdfunding campaigns across the country allow entrepreneurs to grow their businesses with numerous, small-scale contributions from private citizens.

Success stories abound, one notable example being Halifax restaurant Brooklyn Warehouse, which last year raised nearly $21,500 in two months from more than 100 contributors to help cover a $30,000 renovation to transform the site’s summer patio, complete with an all-season atrium.

There are many benefits to crowdfunding for restaurants – not the least of which is freedom from sky-high interest rates.

But there are many potential pitfalls as well, and before you kick off a campaign through Kickstarter or one of the other firms that facilitate such a service, you will need to consult with a restaurant law attorney to be sure your efforts won’t be in vain.

For starters, many businesses are wary of the technical aspects of managing so many small investors.

The most significant issue in crowdfunding right now is your obligations to your investors and to the Securities and Exchange Commission under the newly-minted Jumpstart our Business Act, also known as the JOBS Act. Part of this federal law’s intention is to encourage small business funding by easing several securities regulations. However, the Wall Street Journal reported in December that the SEC is still working on drafting the specifics, including what information recipients are required to give investors and also what kind of role independent regulators, such as the Financial Industry Regulatory Authority, is going to have when it comes to monitoring those Internet equity sales.

The SEC missed its January 2013 deadline to have the rules in place. The FIRA, too was supposed to have hammered out a plan, but they were never given a set deadline. While all this is being worked out, we know that businesses that want to sell online equity stakes to their investors will only be required to use certain registered websites. Further, investors don’t have to be only wealthy, “accredited” investors. Instead, they can be almost anyone with a few dollars to spare.

This means that, as of right now, the people who donate to your company aren’t technically investors – they don’t get any equity stakes in your business. To ensure compliance with current federal laws, restaurants may only offer contributors “gifts.”

The Brooklyn Warehouse offered donors – who forked over anywhere from $10 to $2,500 – something of equal value, such as company clothing, a meal, or some permanent recognition on a wall.

The owners have said crowdfunding worked well for them, helping to eliminate the interest they’d be paying to a large bank and in turn drawing people in and promoting brand recognition.

We urge anyone considering this route to consult with an experienced attorney who can review your approach for effectiveness and legality.

The Wright Law Firm is a business law firm located in Midtown Manhattan—call (212) 619-1500 for a confidential consultation.

Additional Resources:

Stalled Crowdfunding Rules Leave Business Plans on Ice, Dec. 12, 2012, By Angus Loten, The Wall Street Journal

More Blog Entries:

Flexible Leases Give NYC Businesses Options When Online Deals Affect Sales, Nov. 9, 2012, New York City Restaurant Lawyer Blog

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