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WiseOwl58, Attorney
Category: Business Law
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Experience:  Experienced business lawyer.
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Can I issue equity to my contractors in lieu of cash if they

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Can I issue equity to my contractors in lieu of cash if they desire it? Lets say I create a "crowd commerce" website where people do chores for other people. The ones buying the service, make credit payments to us and we pay the money to the contractors minus a fee. But if they are contractors with us, I believe they are eligible for equity compensation, right? Could I allow them to leave some of their money in the company to fund it in return for shares?

How complicated would this be? Lets say for example, that my site has its own share marketplace for trading shares for cash so that they have liquidity. This would be a good way to fund a startup if it is legal.

If so, which SEC exemption would this be done under?
Submitted: 4 years ago.
Category: Business Law
Expert:  WiseOwl58 replied 4 years ago.
Thank you for entrusting us with your important legal questions.

You are entering the world of securities law. This is much more complicated than you imagine.

The applicable securities exemption would be Reg. D. You would also have to comply with all of the securities laws of Illinois.

Essentially, you want to be certain that your contractors are accredited investors and that they have the sufficient knowledge and resources to enter into a securities transaction with your company. You would have to provide them with a stock purchase agreement, and the purchase price would be the amount of pay that you owed them for work already done for you.

There is also a securities questionnaire that is quite comprehensive to ensure that the investor has the requisite knowledge and sophistication to enter into this transaction.

Then you would have to file the applicable exemptions with the securities regulators.

I would definitely recommend you get a securities lawyer to advise you, if you do not have one already.

As to trading the securities on your website, forget about it. If you do that, you would essentially become a securities exchange and that is highly regulated.

I trust this is useful for your purposes. Please press the green ACCEPT button. Thanks.
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Customer: replied 4 years ago.
Just a follow up. So, I know I would have to have a lawyer get this together. But how complicated would it be. Or rather, how much would this cost me to get it set up?

Is there an easy way?

For example, I might try to setup a virtual currency for the site. So the customer pays in real money. The contractors get paid in fakey-bucks of whatever we want to call them. The contractors can use these fakey-bucks as real money on the site for other services. They can also cash them out for real money after a month or so. Then, I am wondering if I can have them convert to equity or something if people choose or something like that.

Any ideas on how to make this work?

I know there are also new laws coming out regarding crowd commerce that might effect it.
Expert:  WiseOwl58 replied 4 years ago.
I can't estimate how much an attorney would charge you to do the securities work, but I wouldn't expect it to be more than $10,000 or so. Perhaps less, depending upon whom you can find.

The part about giving your contractors script that they can use to barter on the site is brilliant. That is really an excellent idea. I think that would work, and your contractors are likely to want to work for barter script if it means they can get services from other members of your site at reasonable or discounted prices.

Be sure to check out what the tax implications to you would be if you paid them in script, but I suspect since they are independent contractors, the tax and reporting issues would fall to them. The compensation you pay them would be deductible to your business.

The part about exchanging the script for equity in your company is what is scary. That might be violative of the securities laws, so you need to work with your attorney on that.
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