Apr 01 2025

Crowdfunding: a legally viable alternative for startups

In the last decade, crowdfunding has established itself as an innovative tool that enables startups to access capital through the participation of multiple investors. From a legal perspective, specialized platforms such as StartupExplore and Fellowfunders have opened up new opportunities while also imposing challenges and regulatory requirements that must be properly managed.

Legal and commercial advantages of crowdfunding

One of the main advantages of participatory financing is the democratization of capital. Instead of relying exclusively on large investors or banking institutions, entrepreneurs can obtain funds from a broad spectrum of small investors. This risk diversification model not only facilitates access to financing but also allows for early validation of market interest. For example, by launching a campaign on StartupExplore, a startup can receive immediate feedback that helps adjust its business model while meeting the informational requirements mandated by regulations.

From a legal standpoint, transparency in communication becomes essential. Crowdfunding platforms typically require the entrepreneur to publish detailed information about the business plan, financial projections, and the inherent risks of the project. This disclosure obligation strengthens investor confidence and helps create an environment of legal security, where every party understands its rights and obligations.

Furthermore, the diversity of models offered by these platforms—such as rewards-based crowdfunding, equity crowdfunding (where shares are acquired), or crowdlending—provides the flexibility to adapt to the specific needs of each startup. In the case of equity crowdfunding, for example, it is imperative that the project complies with securities regulations, which entails greater rigor in drafting contracts and disclosing relevant information.

Legal risks and regulatory considerations

Despite its clear advantages, participatory financing is not without risks, especially from a legal perspective. One of the main challenges is the high public exposure associated with a crowdfunding campaign. By launching a business idea on platforms like StartupExplore or Fellowfunders, the entrepreneur exposes the project to public scrutiny and competition, which can generate additional pressures and, in some cases, legal claims if the disclosed information proves incomplete or misleading.

Another significant risk is expectation management. Investors who participate in these platforms usually expect returns or results within reasonable timeframes. If the project experiences delays or fails to meet the announced milestones, trust may erode, potentially leading to litigation or claims of false advertising. Therefore, maintaining constant and transparent communication throughout the process is essential.

The regulatory environment is another critical aspect. The rules governing crowdfunding vary by jurisdiction and are constantly evolving. Platforms must comply with strict requirements related to investor protection, money laundering prevention, and information disclosure. Failure to meet these obligations can result in administrative sanctions and, in certain cases, criminal liabilities for both the platform and the entrepreneur.

Moreover, the growing competition in the crowdfunding arena demands that campaigns become increasingly professional and rigorous. Market saturation may force entrepreneurs to invest additional resources in marketing and communication, which, if not properly managed, could divert attention from project development and generate legal conflicts arising from ambiguous or misleading promotional statements.

Strategies to mitigate legal risks

To maximize the advantages of crowdfunding while minimizing risks, it is essential to adopt a series of legal strategies that ensure regulatory compliance and protect both the startup and its investors:

Specialized legal advice from the start: having the support of a lawyer or a specialized legal team is crucial for properly structuring the crowdfunding campaign. This involves drafting clear and precise contracts that establish the rights and obligations of each party, as well as preparing terms and conditions in line with current regulations.
Compliance with regulations and due diligence processes: it is vital that both the platform and the startup carry out due diligence processes to ensure adherence to applicable regulations regarding securities, data protection, and money laundering prevention. This not only protects investors but also strengthens the project’s credibility.
Transparency in information and ongoing communication: disclosing detailed and up-to-date information about the project’s development is key to maintaining investor trust. Periodic reports, updates, and open communication help manage expectations and prevent potential litigation arising from misunderstandings or delays.
Legally appropriate marketing strategies: given the fundamental role of communication in a crowdfunding campaign’s success, it is advisable to work with marketing experts who have legal expertise. This helps avoid ambiguous or misleading messages, reducing the risk of sanctions for inaccurate advertising.
Periodic review of the regulatory environment: due to the dynamic nature of the legal framework governing crowdfunding, conducting regular reviews of applicable legislation is recommended. This practice facilitates adapting the startup’s legal structure and the campaign to regulatory changes, minimizing future legal risks.

Democratising access to capital

Funding startups through crowdfunding platforms such as StartupExplore and Fellowfunders represents a unique opportunity to democratize access to capital and foster innovation in the business realm. From a legal perspective, this model offers significant advantages, such as risk diversification, early market validation, and a strengthened relationship between investors and entrepreneurs through transparent communication.

However, it is crucial not to overlook the inherent risks, which include public exposure, expectation management, and regulatory challenges. The key to success in this environment lies in implementing robust strategies that combine regulatory compliance, the drafting of clear contracts, and constant, precise communication.

As a legal professional, I recommend that entrepreneurs consider participatory financing not only as a tool for raising funds but also as a process that requires a solid legal framework from the outset. With specialized legal advice and careful management of legal aspects, it is possible to turn the challenges of crowdfunding into a competitive advantage, driving the sustainable growth of the startup in an increasingly competitive and regulated environment.