Crowdfunding is a way of raising money on the internet for various purposes from a multitude of investors or donors. It has really come into its own over the last 10 years or so. Typically, the person seeking funds raises it by researching the types of crowdfunding, seeking out legal advice, using a crowdfunding portal, complying with all the federal regulations and then launching a campaign to seek investors or donors. After the campaign is launched the name of the game is promote, promote, promote!
There are three main types of crowdfunding: 1) equity crowdfunding 2) reward crowdfunding and 3) Donation crowdfunding. I will discuss each of these in turn.
Equity Crowdfunding involves offering shares of your company to investors in exchange for their capital. This is attractive to start-up businesses who may not have the credit or experience to go to a bank or venture capitalist. There are various regulatory hurdles that must be overcome since the Securities and Exchange Commission (SEC) regulates equity crowdfunding. Reg CF is the principal regulation and it is found in 17 C.F.R. § 227.100 et. seq. Under the regulation issuers of shares must make certain disclosures, are restricted in the amount of compensation they may pay for promoters, and have ongoing reporting requirements. As you can imagine, equity crowdfunding has spawned an entire industry and there are many companies that can assist the entrepreneur in pursuing capital through crowdfunding. Among them are Indiegogo, StartEngine, Kickstarter and CrowdStreet. Many more can be found by a simple Google search.
Reward crowdfunding, on the other hand, involves giving a reward or perk to your investor in exchange for their capital. This can be done with something as simple as a coffee mug or a t-shirt when the funds are deposited with the crowdfunding platform. People use reward crowdfunding as it typically involves more people and brings more attention to the business and basically anyone can contribute to the campaign. However, it does come with some drawbacks. First, raising a large amount of capital requires that many people contribute to your campaign and you will incur expenses when you send the reward to the donor. Second, there is a possibility that the funds you raise may have to be returned in the event that your goal is not met. Nevertheless, reward crowdfunding remains a popular way for businesses to raise capital for their project. Some of the notable platforms for reward crowdfunding are Spotfund and GiveSmart.
Finally, donor crowdfunding from sites like GoFundMe are also popular. Donor crowdfunding has some distinct advantages such as no ownership interest in the business because there are no shares exchanged for the donation. Also, the money does not need to be reimbursed to the donor if you don’t meet your goal. A popular way to use donor crowdfunding is for raising money for medical expenses.
Planning the crowdfunding campaign is critical. The goals of your campaign should be clear in your mind so that you can communicate it clearly to your investors/donors. You should have a good idea of the type of individual you are trying to reach with your campaign. Approval from the platform you are going to use is also important planning. This can take time and therefore it is important to start this process early.
Promotion is also very important. Certain rules exist for promoting your campaign on social media so its important to know them before you begin. You certainly can do the promotion yourself. However, if you wish to hire a professional there are many companies that will professionally promote your crowdfunding campaign. You can spend a little or a lot depending on your goals. It is easy to find someone on Upwork to take on the job or you can hire a company like DNAgency.
No matter the platform you choose or who you have promote your crowdfunding campaign it is important to be open and honest with your investors and donors. Keep good records for tax purposes and be prepare to adjust your goals if needed.
Crowdfunding is a popular way of raising capital for many entrepreneurs. It likely will only grow. If you need advice on crowdfunding, contact Fargo Patent & Business Law, PLLC today!
Fargo Patent & Business Law, PLLC – firstname.lastname@example.org – 701-566-7571