Crowdfunding sometimes comes up as this out-there, nuanced, and vague term used by glamourous tech-startups. It’s also usable by small, service or product businesses in our region. Here’s a quick overview of crowdfunding.
What is crowdfunding? Businesses use crowdfunding to fund a project or venture by asking people or other organizations to make micro-investments. The sum of these micro-investments is the total amount of funding. To pay back the micro-investors, the business either promises some kind of product or service in return for the micro-investment. For example, if I create the next new water bottle, I could get crowdfunding for $15 increments and give everyone a water bottle if the crowdfunding is successful. Alternatively, if I am providing a service, I could give vouchers for the service at certain amounts donated.
Who crowdfunds? Anyone. However, successful crowd funders include outdoor companies, product companies, non-profits with service benefits, media-creators, writers, artists, and service companies. What’s more important than the end product is creating a successful campaign. There are many resources online if you google, “successful crowdfunding campaigns.”
Why would I crowdfund? It’s hip. No really, why? You are struggling for traditional funding or don’t have any investors. You need an insurgence of cash flow for a new product or service. You can use it to market yourself and your services to a broad, i.e. national / international, group of potential customers and future investors. You want to try something new.
When do I crowdfund? Any time you have a product or service you’re ready to launch. As most markets vary through the year, research and consider the best timing to start your crowdfunding process.
How do I crowdfund? The two large companies for crowdfunding are Kickstarter and Indiegogo. Start by browsing the websites and reviewing successful campaigns to better understand the process. Remember, these sites make money from your funding process. Between service and transaction costs, the crowdfunding site typically costs about 8% of your funding request.
Are there any legal issues with crowdfunding? Yes. When you crowdfund, you may provide a service/product voucher as the recoup on investment or may consider the shareholder and securities process, which can get complicated.
If you choose to enter the shareholder and securities process, make sure you understand the legal limitations. Under the Jobs Act, enacted in 2012, the total amount of securities (shares or debts) an issuer can sell in a crowdfund campaign is $1 million over a twelve month period. Investors with less than $100,000 in net worth or annual income are limited to providing the greater of $2000 or 5% of their annual income or net worth. Investors with greater than $100,000 net worth/annual income can invest 10% of their annual income or net worth. This policy is meant to reduce the risk for small investors. The Securities Exchange Commission has additional regulations for buying and selling shares. Please read these or consult a securities lawyer before starting the investment process.
Should you crowdfund your business idea? I can’t answer that question for you, but I recommend researching other crowdfunding success and failures to determine if the time and energy would be beneficial for your idea.
Disclaimer. As always, my column is not legal advice, instead merely insight into the law and legal profession. If you have a general question about the law or legal profession, please email me at email@example.com or call 435.610.1431.
Published in the 09/19 Wayne & Garfield County Insider.