What is Crowdfunding?

 

“…for start-ups and small businesses, this bill is a potential game changer.  Right

now, you can only turn to a limited group of investors — including banks and wealthy

individuals — to get funding.  Laws that are nearly eight decades old make it impossible

for others to invest.  But a lot has changed in 80 years, and it’s time our laws did as

well.  Because of this bill, start-ups and small business will now have access to a big,

new pool of potential investors — namely, the American people.  For the first time,

ordinary Americans will be able to go online and invest in entrepreneurs that they

believe in.”       President Obama, JOBS Act Bill Signing, April 05, 2012

 

Crowdfunding is the collective effort of individuals, each contributing money to a cause.

It is not a new activity for most of us have been contributing to charities, relief efforts,

school projects and our churches. What is different is the recipient of the funds and the

medium utilized to market and promote the fund raising effort.

Today crowdfunding is being undertaken to support an entrepreneur with a new

idea, product or project. In return for the contribution, the donor receives a reward.

It can range from a simple thank you letter, the actual product being developed or

a donor party. For example, if a software engineer needs $200,000 to complete the

development of a new iPhone application, he can crowdfund the project and in return,

for every $10 contribution, give the donor a copy of the application. In the majority of

projects, there is an escalating set of rewards matched to higher donations.

The second difference is the medium. Funding is now taking place over the Internet via

crowdfunding sites. Some sites, such as Indiegogo support any type of project, Involved

Fan funds athletes, and Nap Time Startups, with which I am affiliated, solely funds Mom

and Women Entrepreneurs.  Each site provides the business person with the tools for

promoting their fund raising campaign (which on average lasts about 40 days) on social

media such as facebook, their web site, etc.  In effect, the crowdfunder executes a

social marketing program to drive donors to their funding site.

 

The process described above is called the Reward or Donor based Crowd Funding

Model. Today it is the most popular type of crowdfunding.

 

Hopefully, starting in 2014, within the US, we’ll have Equity-based Crowdfunding. It

is designed to enable companies to raise as much as $1,000,000 from the “crowd.”

Similar programs have been in effect in England, Australia and France, Here’s the

background and the particulars.

 

In 2012, to encourage the expansion of entrepreneurial activity and business growth,

Congress passed the Job’s Act – Jump-start Our Business Start-ups.  One of the

requirements is for the Security and Exchange Commission to ease fund raising

regulations to enable the advertising and raising of funds from small investors.

In effect the legislation empowers any individual to invest up to $2,000 in any

company. Previously, within the US, investments were limited to accredited investors

-someone with a net worth of at least one million dollars not including the value of

their primary residence or have income at least $200,000 each year for the last two

years (or $300,000 together with their spouse if married) and have the expectation to

make the same amount this year.

The third type of Crowdfunding is debt-based.  Rather than utilizing a commercial bank,

the entrepreneurs reaches out to the crowd for funding. This type of Crowdfunding

is also known as peer-to-peer lending. According to research firm Massolution, debt

crowdfunding grew over 100% from 2011 to 2012 and is expected to double again in

2013 reach over $2.5 billion.

 

Now let’s summarize the above.

 

Donation/Reward Based Crowdfunding

Process

You ask the crowd, via a crowdfunding site, to contribute funds to your entrepreneurial

activity in exchange for a reward.  Typically, the greater the donation, the greater the

reward.  The process takes about 30 to 60 days.

Funding Range

Typically $5,000 to $500,000, but some have raised over $10,000,000.

Funding Needs

• Seed capital for turning an idea into a product or developing a prototype.

• Expansion capital for entering a new market or developing a new product.

• Purchasing capital equipment to improve manufacturing efficiency.

• Developing a mobile application.

Your Responsibility

Legally nothing; but since fund raising is an ingredient for successful growth, you should

provide subsequent reporting on how the funds were spent.

Equity Based Crowdfunding

Process

You ask the crowd (i.e., small investors), via a crowdfunding site, to buy an equity stake

in your company.  Depending upon the Security and Exchange Regulations, which

should be issued by early 2014, you will be undertaking contractual commitments

including representations and warranties, due diligence checklist, and possibly

undergoing background checks.  Basically, you are entering a contract to sell an asset

(i.e. equity in your company) and you will be held accountable to fairly represent the

asset at the time of the sale and obligated to your new shareholders in terms of what

you will be doing with the funds. The process will take 3 to 6 months, but will usually be

less time and effort than raising any other form of investment capital.

Funding Range

Up to $1,000,000.

Funding Needs

• Launching or expanding a company.

• Market expansion.

• Plant capital and equipment.

Your Responsibility

Legally adhering to all contractual obligations including how monies are spent.

Debt Based Crowdfunding

Process

You ask the crowd (i.e. investors), via a crowdfunding site, to provide you with a loan.

As with equity based crowdfunding, you will be undertaking contractual commitments

and will be held accountable.

Funding Range

Depends upon asset being purchased.

Funding Need

• Plant capital and equipment.

• Working capital.

Your Responsibility

Legally adhering to all contractual obligations including how monies are spent.

 

Nap Time Startups is a company dedicated to raising money for mom and women entrepreneurs through crowdfunding!

 

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