The original movement known as Microfinancing began as an effort to fund small business ventures without having to use traditional (and too often difficult to get) bank loans and associated requirements. This happened in the U.S. and elsewhere.
Crowdfunding uses the internet to connect people looking for funding with those who wish to invest. It started out as a tool for funding new businesses. Now it can be use for personal funding needs as well.
Is Crowdfunding right for you?
Crowdfunding Your Business or your personal needs is an intriguing concept. It could also be one that could be just right for your needs. This is true now for individuals, startup startups or growing businesses.
There have been a flurry of news stories and attention to crowdfunding, creating controversy and debating pros and cons. But it has now proven to be useful to both businesses and people needing money.
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Update January 2018 According to Massolution — an outfit that writes industry reports, in 2015 the crowdfunding industry had fundraising volume of $34 billion (though $25 billion of that was peer to peer lending, not technically crowdfunding.) $18.2 billion of that was in North America. So this is certainly a very legitimate way to get funding, particularly for businesses and nonprofits. If you’re trying to choose one of the platforms, Investopedia rates the top three as follows: (1) Kickstarter. The granddaddy of them all and currently the most active. It has helped people raise more than two billion dollars. (2) Indiegogo. This platform has raised $1 billion since it began in 2007. They support cause related and humanitarian projects in audition to businesses and charities. It also has some more flexible plans than Kickstartr. It lets you keep all the money you raise whether you meet your target or not — though it takes 5% of what you raise (and adds charges for credit card contributions. Number 3 on Investorpedia’s list is CircleUp. This platform is based in San Francisco and helps entrepreneurs and emerging brands. They are known for good due diligence on the businesses it allows to participate and investors frequently offer good strategic advice based on their own experience.
January 2017 Update If your startup is in the high tech area and you hope for high growth, the new “regulated crowdfunding” is probably not going to work well for you. A product of the “JOBS Act”, this new flavor was supposed to allow companies to accept investments rather than donations. So it would allegedly have the benefits of an Initial Public Offering without the hassles of constantly reporting to the SEC. However, new rules written into the Act significantly limits the number of investors you may have or the amount of assets you may accumulate before you have to begin filing all those pesky disclosures — just as you would if you were a public company. So the protections being implemented by the SEC have basically changed the intent of Congress. Perhaps things will change with a new administration.
News September 2016 At least one newer platform called NIN.VC is a combination of typical Crowdfunding Portals and the traditionally known venture capital (VC) fund. It allows accredited investors to invest directly in new firms and entrepreneurs and it provides direct support to entrepreneurs — who are typically quite young. As such they can use the extra foundation of help with public relations and marketing, organizing, attracting strong talent, and more. At the moment only accredited investors can get in on these deals but NIN.VC plans to make such investment available to all.
News August 2016 The new fundraising rules have gone into effect and now approved crowdfunding sites may be used to attract funds from investors rather than by just giving away appealing trinkets and rewards for donors. As much as $1 million can be raised under the new rules (the result of the JOBS Act — Jumpstart Our Business — of 2012). It’s off to an expected slow start since there are complex new processes to be followed and disclosures to be documented. Crowdfunding platforms who wish to participate must be approved — so far more than 40 have applied and five of these had been approved as of last month. This is a great opportunity for companies who understand the implications — i.e. that they will need to file more financial information publicly and they will be dealing with hundreds or even thousands of investors. Crowdfunding continues to change the face of fundraising — and investing!
Update August 2017 Regarding the subject of equity invested discussed in the August 2016 update above, many folks have wondered about the possibility of an aftermarket for their equity shares. Until recently all have had to wait for what is called an “exit event” for the company founders — that is, an IPO (Initial Public Offering), where shares are offered on the public market and often lots of money is raised, to the delight of those in early. But now in the UK at least one company is offering a secondary market for equity shares, allowing investors to trade shares with others investors and not be “stuck” waiting for an event that is out of their hands. Many are wary of this new twist and some careful rules and restrictions are in effect, but the situation is definitely one to watch. If it is successful in the UK, the US should also be willing before long to allow it here. Food for thought!
News April 2016Crowdfunding is in the news as more and more as start-ups are choosing it over venture capital. It is becoming increasingly popular for early stage funding. And with new federal regulations going into effect this spring, companies will be able to offer contributors a piece of their business rather than just a small prize or other incentive. So crowdfunding may become even more popular. Still, VC firms are not worried that their business will dry up. Though crowdfunding campaigns have raised as much as $20 million (a record) , the average raised is closer to $3000. And it’s tough: only 36% of Kickstarter campaigns reach their funding goal — which means they get nothing at all (and donors get their money back).
If you are looking for funds because you have medical bills, need to buy a car for a job, are down on your luck and need to get you life back together or any number of personal needs, crowdfunding can also be for you. Because the sites that support personal crowdfunding are different from the business sites, we cover them in a separate article. Please go to Free Money 2015 to learn more about personal crowdfunding – and to see a very useful summary review of the top sites that can help you change your life.
Crowdfunding sites like Kickstarter and Indiegogo already exist – so why are people acting like crowdfunding is something new? The main difference is very basic: those sites allow people, businesses or other organizations to raise money from others through donations, not technically through investments. Until now the law has prohibited advertising and certain types of promotion to solicit investment in a business venture. Companies have been strictly limited in the amount they can raise from the public without extensive and often burdensome filings and compliance with the Securities and Exchange Commission (SEC). So the sites noted above allow you to create a campaign and tell your story to attract donatons in return not for equity in and a financial return from your business, but for some sort of appealing “goodies” you provide. If you’re a restaurant you might throw a party for big donors, or send a copy of the opening day menu – you are limited only by your imagination. Some people invest just to feel a part of a community, so the gifts you offer do not have to be expensive.
That format makes it easy for anyone to participate, whether you are trying to raise money or you want to contribute and feel connected to someone else’s dream. This approach may be just right for you! What are the drawbacks? You will not raise as much on these sites as you could through a formal stock offering. And, unless you are a certified non-profit (a 501C3) you will be taxed on the donations you receive. If you prefer to pursue a more traditional approach to funding your business, discover current options available on Fund A Startup Business.
New Crowdfunding Opportunities
Equity Crowdfunding: A relatively new wrinkle has changed the playing field for some looking to fund new businesses. Up until now small companies have only been able to use crowdfunding to raise money in return for small gifts or tokens of thanks. They have not by law been able to crowdfund company equity in return for actual investments. Now in about two dozen states companies can in fact sell securities to small investors in their own states. If you’re interested in doing that it’s worth checking with your state to see if they have enacted laws to allow you to do that. But know that the road appears to be a rough one, at least according to the Wall Street Journal. It can take a lot of effort and hours to spread the word in your state and to convince potential small investors to take a leap and put some money into your company. Such investors can require a lot of handholding (a major time consumer) and you won’t get much sage advice in return. A grilling by a Venture Capital firm may be daunting but at least you might learn a lot from their questions. However if you make a popular consumer item a statewide tour promoting your product and seeking investment funds could make sense for you.
Crowdsourcing can also be an interesting option for investing — and it can certainly earn more for you than the interest rates banks are paying these days. Will you get to get in early on a hot new IPO (Initial Private Offering)? Not likely — but you could end up with shares in a very successful company if you play your cards right. And there are way less stringent requirements for investors who no longer need to be “accredited” to be allowed to participate in an investment. And you could be able to get in for as little as $10 on sites like Startengine, Wefunder and Seedinvest. These are “equity funding” sites where you’re actually buying shares in a company rather than donating for perks like on Kickstarter. If you’re tempted remember that this isn’t for the faint of heart — and you should never invest more than you can afford to lose.
Note: if you are looking to raise money for something other than business - like for your personal financial situation or to pay off medical bills and such - check out Free Money 2015. It includes a review of four different types of crowdfunding platforms you could find useful.
Recent legislation is causing a major shift in the opportunities available in the crowdfunding arena. The JOBS (Jumpstart Our Business StartUps) Act passed and was signed into law by an enthusiastic President Obama. (Note: per the News Update below, it is not clear that this Act will in fact be what the President claimed…)
While the Act does not directly create jobs, it is called a jobs act both to garner political favor and because most new jobs are created by new companies. And, small businesses account for 50% of employment in the United States. So one hopes that by making it easier to create and grow new companies, more companies will be willing and able to create new jobs in the near future.
News Update A move by the SEC at a meeting in August 2012 casts some serious doubt on how successful the JOBS Act will be in making it easier for small companies to raise funds. They determined that there may be new “classes” of investors defined, with each having its own set of requirements for certifying that they are indeed qualified investors. If the current process of “self certification” is not maintained, the numbers of willing investors may be drastically reduced. Such a result would be extremely disappointing and could essentially nullify the assumed benefits of the JOBS Act.
Will the “new” Crowdfunding be right for you? If the SEC determination noted above can be changed or minimized, the intended relaxing of restrictions on raising money from the public should make it easier for entrepreneurs to raise money online, and to do so without extensive filing with the SEC. In fact you should be able to raise up to $1 million online from individual investors while providing a very low level of financial disclosure. And small companies would be able to sell as much as $50 million in shares without registering with the SEC. (They will be limited to 1000 shareholders, whereas the current maximum is 500). Per the JOBS Act, investors do not have to be “accredited” – that is, no one has to prove they have a minimum level of financial savvy or qualifying net worth in order to be allowed to invest. However, that may change given the recent declaration by the SEC.
So what is the controversy over Crowdfunding? Detractors fear that the new legislation goes overboard in relaxing requirements and will make investors too vulnerable. Basically the Act leaves judgment in the hands of the individual. In and of itself, that seems a good thing – and wouldn’t it be great if the broader availability of investment opportunities for the masses causes increased education to be provided both for students and for investors?
Whether you have a business or at this point just a dream, stay tuned for new opportunities in Crowdfunding!