Crowdfunding is "open source financing," or the solicitation and collection of small dollar amounts of money from a large number of individuals to help finance a new business venture. There are several types of crowdfunding: Reward-Based, Peer-to-Peer, Donation-Based, Equity, Real Estate, Human Capital, and Lending. Crowdfunding uses social media and other tools to create, manage and energize a network of people to participate in a campaign. Crowdfunding websites have the ability to seamlessly and quickly bring investors and entrepreneurs together. This allows one to potentially increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of banks, credit unions, loan funds, owners, relatives and venture capitalists. For more, see The JOBS Act: Crowdfunding Guide to Small Businesses and Startups 2nd Edition, Kindle Edition.
Most people know crowdfunding via websites like Kickstarter and Indiegogo. These sites "attract hundreds of thousands of people hoping to invest in the next big thing." Kickstarter is the biggest crowdfunding platform: founded in 2009, more than 160,000 projects have been successfully funded, with more than $4.2 billion dollars pledged. Indiegogo, the next largest site, "initially focused on raising money for independent films, but began accepting projects from any category a year after its launch in 2007."
With the introduction of the JOBS Act, Regulation A+ (Reg A+) offerings, which are marketed as "an alternative to a traditional IPO," are supposed to make "it easier for smaller, early stage companies to access capital." It does not work as well as it should. "Reg A+ allows companies to offer shares to the general public and not just accredited investors." You need to "file with the SEC and get approval before launching a mini-IPO."
It can provide access to capital.
Get Advice on Crowdfunding...Many crowdfunding platforms have noted their desire to make small business financing available to women and minority firms. The problem is that crowdfunding is still very new, with many of crowdfunding platforms still being formed, and with few focused on women and minorities. The platforms we have evaluated have a bad track record of helping minority owned businesses, and only slightly better record with women owned firms. It's still 20-something white males who benefit.
Still, as with other new forms of financing, if you can access this type of funding, it should be on flexible, lower cost than normal terms.
For donations based crowdfunding, there are few eligibility requirements. Regulation Crowdfunding and equity (Reg A+) crowdfunding is another matter altogether: "a company is permitted to raise a maximum aggregate amount of $1,070,000 in a 12-month period; individual investors are limited in the amounts they are allowed to invest in all Regulation Crowdfunding offerings over the course of a 12-month period; a Regulation Crowdfunding offering must be conducted through one online platform that is registered with the SEC and FINRA.
To make the best use of this resource, we suggest you research specific crowdfunding platforms to find out exactly what they look for when it comes to eligibility.
"Certain companies are not eligible to use the Regulation Crowdfunding exemption. These include: non-U.S. companies; companies that already are Exchange Act reporting companies; certain investment companies; companies that are disqualified under Regulation Crowdfunding’s disqualification rules; companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement; and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies."
Most crowdfunding platforms do not focus on women or minority businesses.
As we noted, anyone can use donations based crowdfunding. There are platforms that focus on just about every sector. For equity crowdfunding, the major platforms suffer from the same issues that mainstream financial institutions do: they are biased and bigoted.
The following documents may be required:
Fees vary widely for the different types of crowdfunding. Below, we cover charges for the most expensive type of crowdfunding, Reg A+ Equity Crowdfunding.
Other Fees include Late Payment Fees, Closing Fees, taxes.
Apply For LoanMinority Small Business Opportunity Zone financing.
Crowdfunding was originally intended to help small firms and people with good ideas who were locked out of the capital markets. No group fits this description better than women and minorities, yet they have been unable to take advantage of crowdfunding in any meaningful way.
As with venture capital, online lenders, and microcredit firms targeting women and minority businesses, you have to look for crowdfunding platforms targeting women and minorities. You must conduct a comprehensive review to determine if any work with women and minority businesses. If you need help, contact us.
As we stated in the Washington Post on June 3, 2012, "crowdfunding can potentially level the playing field, opening new sources of business capital and revenue for women- and minority-owned firms. Crowdfunding works this way: An entrepreneur with an idea for a company or product posts the details of the idea or product on a Web site such as Kickstarter. The posting includes information on the amount of money needed, benefits to those who contribute to the project and information on the developers. The crowdfunding provisions of the JOBS Act allow start-up and other companies to sell up to $1 million in equity, or ownership shares, in their business. Our company has been facilitating this type of business financing since July 1998. The crowdfunding and other provisions of the JOBS Act offer women and minority firms an opportunity to raise funds from a wide community of investors, without having to go through banks and other financial institutions that often put roadblocks in their way. While this is no panacea, crowdfunding expands business financing options far wider than previously. It’s an option more minority- and women-owned firms should consider."
Donations based crowdfunding is unregulated, but the FTC has some limited oversight. The SEC regulates JOBS Act equity and debt based crowdfunding.
We have included some forms and templates you might find helpful in your search for crowdfunding capital.
These sample funding documents are educational in nature. You will still need to review all documents with your team and with a lawyer.
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