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Funding Your Startup? Regulatory Concerns to Keep in Mind

Just a few short years ago, building a successful startup involved one tried-and-true path to capital and growth: a traditional funding series beginning with friends and family and leading to VC firms and angel investors. Since that time (a short but dizzying trip), new options have appeared on the funding landscape and evolved very quickly.

For example, as blockchain technology became available and bitcoin prices surged, startups began financing their operations using Initial Coin Offerings, which in many cases led to quick but unstable fundraising vehicles. ICOs are still a perfectly reasonable option for those who would rather avoid VC funding, but the SEC has turned a sharp eye on the practice, and startup owners must be ready to assure regulators that their ICOs are based on simple tokens, not securities designed as investment instruments.

So ICOs come with stringent requirements that protect investors, and so do to traditional funding rounds. Most enterprise-level investors will conduct due-diligence examinations to make sure a given startup can check every relevant box related to both financial security and data management practices (Any startups hoping to attract these investors will need to comply with HIPAA and GDPR requirements, and are advised to make sure their practices align with the five “trust principles” of voluntary SOC-2 compliance).

If you aren’t sure your startup can cover these hurdles just yet, you aren’t alone. Rigorous compliance can require time, money, and professional and legal guidance. You certainly can climb this mountain (our team can help!) but in the meantime, a few options are available that can help springboard your shoestring startup to a more competitive level with a bit more breathing room. Before you begin your funding series, consider these alternative paths:


Standard online platforms for crowdsourcing are generally approved by the SEC and they typically vet companies before stepping in to serve as an online investment bank.

Convertible notes

By using convertible notes, investors who put money into your business will receive stake in the business in return (equity), instead of repayment and interest. This is a form of short term debt that many investors consider safe and reliable.

Merchant cash advances

This option allows a number of merchants to provide the startup with an advance. A credit card processing company then takes a percentage of each transaction and hands it back to the merchants until the debt is repaid. Conveniently, the repayment process begins the minute the company starts doing business.

Keep in mind that each of these options will still bring regulatory and legal requirements (though these requirements may be more lenient than those brought by more traditional options). For guidance that will fit both your business goals and your budget, contact our office.