4 Basic Questions About Crowdfunding Answered

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ParticipantHere are answers to the questions you probably have about crowdfunding.  I'll also list some questions to ask yourself before starting on a crowdfunding campaign.

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1. What is “crowdfunding”?   “Crowdfunding” means raising money by collecting small amounts (e.g. $25) from many individuals.  This is usually done through a crowdfunding website, or “portal,” but it could be done through your own website.  The most famous crowdfunding portals in the US right now are Kickstarter and Indiegogo.  Another famous example is President Obama's 2008 campaign.

Since crowdfunding is growing in popularity, people are using the term more in different ways.

“Crowdfunding” is usually donation-based, but some new companies have started websites that bring businesses and investors together to do traditional venture capital deals, and that is sometimes referred to as “crowdfunding.”

2. Who can use crowdfunding? Anyone can raise money through crowdfunding.  Kickstarter, Indiegogo, and many other sites are open to for-profit businesses.  Contrary to a popular misconception, for-profit businesses can take donations!  Only donations to organizations with 501(c)(3) tax-exempt status are tax deductible.  That just means that if you run a for-profit business, your donors won't be able to deduct this donation.  You could ask your accountant how to handle the income from the donations.

Any business or project can find an appropriate portal.  Kickstarter is for creative projects, that is, projects that will result in something new.  It includes artwork, literature, film, technology, and even food.  For example, Kickstarter campaigns include a Pierogi food truck in Chicago, a cookbook that will show you how to “cook like a real man,” and, of course, hot sauce.  What about people building healthy food systems?  A hoop house for a schoolyard garden met its goal on Kickstarter.

Indiegogo allows anyone to raise money for anything.  Other platforms allow a broad range of purposes or focus on something specific, like music, TV shows, education, or helping people after an illness.

And by the way, everyone should take a look at Kickstarter.com.  It is full of regular people doing amazing things, and it makes you want to do some of the amazing things you've been thinking of doing, too.  How often are you surrounded by people taking on the projects of their dreams?

3. How do I know if I should try Crowdfunding?  Here are some questions to ask yourself:

  • Do I/we have the capacity to plan and execute a serious, intense fundraising campaign that will probably be my major activity for 45 or more days straight?
  • Can I make an extremely short yet compelling video that authentically expresses myself and my project, my inspiring vision, and shows that I can complete the project?
  • Would I like to receive donations, rather than take a loan or sell a piece of my business?
  • What are my alternatives?  How much money do I need to raise, and how much is available from my friends and family, banks, or other investors?

DON'T ask whether there is a fan base that has the money.  Crowdfunding to date has shown that the money is there.  The question is, can you reach the people who'll be inspired by your message?

There are other benefits.  A crowdfunding campaign will help a large number of people get to know you and your product or service.  This is why crowdfunding is especially suited to businesses that are addressing a social or environmental issue—this gives people a reason to get excited about donating and telling others about your project.  A crowdfunding campaign will build your community of supporters and your customer base.  If you're successful in your fundraising campaign, your donors will be that much more committed to seeing your business succeed over the long term.  Even if you don't raise the funds you hoped for, you still get the benefit of the outreach.

4. Are there any legal issues to worry about? If you are just seeking donations, no.  But be aware that offering “rewards” in exchange for donations has the potential to violate securities law.  Right now in the US, it is illegal to sell investments to the public without completing a very expensive registration requirement with federal and state securities regulators.  So keep it a donation, not an investment.  Make sure the cash value of your rewards is minimal, so that no one could reasonably think the reward was the main reason someone donated, and so that the reward can't be considered a return on an investment.

This will all change, by the way, when the new CROWDFUND Act goes into effect.  That Act, part of the JOBS Act, was signed last year.  It will allow businesses to raise up to $1 Million by selling investments to ordinary folks, and it will allow ordinary folks to move some of their investments from huge corporations to smaller, local businesses, or really to any business that chooses to raise money through crowdfunding.  This could start a major shift in the landscape of investing and in how money is spread through our economy.  But it's not effective yet because the Securities and Exchange Commission has not made the rules that will govern the process.  This rule-making will be a somewhat lengthy process, with time for public comment, and no rules are proposed yet.

There are some websites through which businesses can offer investment opportunities right now.  Assuming they are operating legally, those websites are using exemptions to the federal securities registration requirement, typically by offering investments only to residents of one or a few states, or by offering investments only to “accredited investors,” (otherwise known as wealthy people).  So that is an option too.

If your business has the capacity to run an exciting and sustained fundraising campaign, and you want to raise money and build your community, your next step might be to read articles and look for videos on how to make your crowdfunding campaign a success.

Sarah Kaplan is business attorney for green businesses, worker cooperatives, and social enterprises.  Visit Sarah at www.sarahkaplanlaw.com.

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