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Crowdfunding
The Breakdown
Summary:
Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large pool of people, typically on the internet. There are two types of crowfunding: Donation and Equity-based.
Pros:
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allows you to gain customers and investment simultaneously
Cons:
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limits on the amount of money that can be invested
Top Crowdfunding Websites
Click on one of the following icons to see which website would best fit your needs of your small business or start-up company.
Crowdfunding is the practice of raising capital via monetary contributions from a large amount of people. Today it is often performed online, but can also be done through mail-order subscriptions, benefit events, etc.
The Crowdfunding Centre's May 2014 report determines two types of crowdfunding:
- Donation-based crowdfunding: entrepreneurs pre-sell a product or service to raise awareness of a new business concept.
- Equity-based crowdfunding: the lender receives a share of the company in exchange of the money lent.
In the U.S., crowdfunding is restricted by regulations on who is allowed to fund a new business and how much they are allowed to contribute. As for donation-based crowdfunding, donors typically do not require a return on investment for donation-based crowdfunding, but they donate in small amounts. It is a way to access capital via a project by asking a large number of contributors to donate on their own volition.
The SEC just voted and passed passed the equity crowdfunding rulings Title III of the JOBS Act. Equity crowdfunding allows investors (accredited and non-accredited) to reap financial returns on their investments on a larger scale than donation-based campaigns. This will allow equity crowdfunding to exponentially grow over the next 3-5 years. Should you engage in equity crowdfunding, understand that this is a recently passed law. We strongly suggest further investigations before you proceed.
Three Types of Equity-based Crowdfunding
Equity I: Enacted as a result of the IPOnet, SEC No-Action Letter issued in 1996 — accredited investors can have access to investment opportunities on a password-protected website. Founders who use Equity I rely on Rule 506 of Regulation D, which allows them to raise an unlimited amount of capital from an unlimited number of accredited investors.
Equity II: Relies on Title II of the JOBS Act which went into effect last September and allows entrepreneurs to publicly advertise their need for funding. Founders can raise an unlimited amount of capital from an unlimited number of accredited investors — all done through equity crowdfunding portals. It is becoming the most popular type of equity crowdfunding by exposing entrepreneurs to a 6-8 million accredited investors in the U.S.
Equity III: This category is expected to go into effect later this year, this type will allow unaccredited investors to participate (99% of investors). Allowing equity crowdfunding platforms to offer and sell securities online, entrepreneurs will enjoy the ability to potentially reach out to over 50 million Americans. Evidently, entrepreneurs will have more regulatory requirements to manage.