“…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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