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 firstname.lastname@example.org or call 435.610.1431.
Published in the 09/19 Wayne & Garfield County Insider.
Hello readers! A few of you have asked me to write about vacation peer-to-peer rental liabilities. Vacation peer-to-peer rentals include homes rented under companies like Airbnb and other home sharing companies. These rentals provide much needed and enjoyed supplemental income for homeowners and families. When placing your home as a vacation rental, make sure to consider the following factors.
Read your home insurance policy. Some home insurance policies somewhat cover businesses in the home but many do not. Typically, the business must make a maximum revenue to be covered. Other home insurance policies only cover the people named on the insurance policy and their guests (not paying clients) and relatives. Lastly, a home insurance policy may require the named insured to live at the home for the policy to cover the home. Consequently, during a vacation renter’s stay, a fire, plumbing flood, or other home issue could not be covered by your policy and you would have to pay, in full, for the damage.
Read the vacation rental company’s host coverage policy. The company’s policy may only cover damage during the booked period, require reports within a certain time-frame, have limited value or max coverage amounts, and require the rental be in complete compliance with the company’s policies before providing coverage. Compliance could include safety features such as smoke detectors, adequate lighting, or requiring homes comply with local building ordinances. By reading the company’s home policies and damage recovery policy, you can understand where there may be gaps between your homeowner insurance the company’s policy.
Consider your personal liability. You are liable if a guest is injured, becomes ill, or has their property damaged in your home. Your homeowner insurance and the vacation company’s insurance most likely do not cover your personal liability. Remember that quaint, creaky back stairway into your home? Your slippery walkway? That beloved cactus plant on your front porch? The specific way you must push the nob to turn off the stove? After giving you some things to fret about, the good news is that an umbrella personal liability coverage is very valuable if you are running a small business and renting out your home for short periods is a business. It can help you avoid major financial crises from an injured guest, reduce your risk, and protect your profit margins.
Celebrate your entrepreneurship and small business ownership. If you rent out your home as a vacation rental, you are running a business. The IRS distinguishes between long term renting (such as having tenants) and vacation rentals. If you are a landlord with a few rental units, you are not necessarily a small business. However, if you are running a vacation rental, you are a small business. Small businesses must file with the IRS, the state, and their city or county. Further, vacation rentals must pay federal and state taxes, including occupancy taxes. Businesses must also meet zoning requirements for their communities to retain their business license. Failure to become licensed by the federal government, state, or local government can result in preventable fines and headaches.
Everyone could use and should consider how to make a supplemental income and embrace economic opportunities. Vacation rentals are a great way to increase your income and meet the market demands of the area. Before you decide to add your residence to the vacation rental community, make sure to do your research and be comfortable with the risks you are taking.
Disclaimer: All materials in this article are prepared for general information purposes only to permit you to learn more about legal concepts. The information presented is not legal advice, is not to be acted on as such, may not be current, and is subject to change without notice.
Published 11/16/2017 in The Wayne & Garfield County Insider.