What is crowdfunding?
Technology and social media do great things for business like increasing exposure, allowing the business to exploit subject matter expertise and providing the public with minute by minute access to information about the business. Technology and social media has also prompted the creation of crowdfunding as a method of building capital. This post will introduce and discuss, donation based and investment based crowdfunding. It will also briefly talk about the JOBS Act. Future posts will expand on these topics and the law that a growing company must consider when raising capital.
Crowdfunding is a method of raising capital for a business, project or cause where a group of people put their money towards the business or product in exchange for some sort of good. Starting with websites like Kickstarter, Rockethub, and Indegogo which allow people to fund projects in exchange for some non-equity based product, crowdfunding has expanded to sites like Crowdfunder which allows people to fund projects in exchange for equity in the business.
Donation based crowdfunding
With donation based crowdfunding, people give money in support of a project or product in exchange for something else, whether it’s a copy of the video game you are creating, an early version of the product or some sort of recognition when the project is complete. The crowd of people supporting your project do not get equity in your business. Donation based crowdfunding is the popular method of crowdfunding and has been around the longest.
Investment based crowdfunding
When people donate money to the business or idea in exchange for ownership interest in the business they are taking part in investment based crowdfunding. This type of crowdfunding developed after passage of the JOBS Act and related SEC regulations. In short, the JOBS Act was passed to encourage entrepreneurship and technology, thus boosting the economy. It is now easier for companies to solicit investors and for investors to invest in the companies. Although easier, investment based crowdfunding still requires compliance with federal law and SEC regulations and has limitations on investing. It’s important to have the advice of counsel if considering investment based crowdfunding especially.
Preparing for crowdfunding
A crowdfunding campaign starts with:
- A well thought out business plan
- A fundraising goal, and
- A project
An effective business plan is essential to any business and facilitates the project’s successful marketing, goal setting and fundraising. Not to mention, you have to get the word out and you need a plan to do that. The fundraising goal is a strategic amount that you, as the fundraiser, want to raise. You determine the amount before you start the campaign. It’s important to have a clear picture of the funds needed to get the project completed. With some sites, like Kickstarter, if the project is not fully funded, you get nothing. This is called an “all or nothing” approach. Other sites, like Rockethub, take a larger percentage fee if the project is not fully funded. Still others, like Indegogo, give you the option of an “all or nothing” project or paying a larger percentage if the project is not funded. Finally, the project. A project is the final piece of a crowdfunding campaign. According to Kickstarter, a project is something with a clear end, that will eventually be completed and where something will be produced as a result. Different sites have different requirements for projects. Kickstarter wants creative projects, “Art, Comics, Dance, Design, Fashion, Film, Food, Games, Music, Photography, Publishing, Technology, and Theater.” Rockethub and Indiegogo have broader requirements for projects.
Choosing a crowdfunding service
The appropriate crowdfunding service to choose depends on business strategy, product or service and strategic goals. Also, the type of business entity will effect fundraising and future growth. Is the business for-profit or non-profit? Is the business looking to fund a single project? Multiple projects? A cause instead of a project? How is the business organized? Is it an LLC? A C-Corp? A S-Corp? What sort of investor does the business want to attract? How much of a stake in the business are the owners willing to share? An attorney can provide the advice and assistance in order to protect the business and facilitate long term growth by working with the fundraiser, particularly with investment based crowdfunding that requires compliance with federal SEC regulations.