Many entrepreneurs were excited last year when Congress legalized the use of crowdfunding for equity investments. This law, passed as part of the Jumpstart Our Business Startups Act (JOBS), would allow a business owner to raise up to $2 million over the Internet from individuals who invest a maximum of $10,000 per person. Too good to be true?
Well, first the Security and Exchange Commission (SEC) has to issue regulations to implement the law. The SEC has a lot on its plate, including implementation of a law that overhauls how the US financial system is regulated. So at this point it seems unlikely equity crowding will happen anytime this year.
In the meantime, the “other” kind of crowdfunding is growing like wildfire. In this variation, which is completely legal today, a company can raise money from its peers through a online platform by offering interest or non-financial “rewards” as the return for “investors” making a cash investment. Not exactly equity, but cash is cash.Kickstarter is the most visible platform, and there 100s of others that specialize in one area or another.
In 2012, companies and individuals raised $2.7 billion from crowdfunding websites in 2012, for a whopping 81% increase over the previous year. While most of these campaigns involved social change organizations, there has been shift toward funding new businesses and small firms, which is expected to double crowdfunding in 2013 to a $5.1 billion industry. (Source)
We call this form of crowdfunding “peerfunding,” since, by and large, there isn’t pool of investors waiting to make these kinds of nonequity, minimal return investments. No surprise there.
Rather, it can be an effective technique to organize and energize your supporters to help you reach a target for capital needed to launch your business or expand it to the next level, even if you have give up a few % of your take to pay off the online platform.
So as you explore financing options for your business plan, be sure to consider crowd sourcing as a possible alternative or supplement, to convert your supporters into “investors” to raise small amounts of capital without the control and return issues you would face with real equity.
- Copyright © 2013 Rolfe Larson Associates
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- Speaker, Social Enterprise Summit, Minneapolis, May 19-22, 2013