The process of raising funds by obtaining small amounts of money from large groups of people, through the internet is known as crowdfunding. Following are information, resources, and tools, related to this financing methodology.
Background Information
Crowdfunding is a process of raising funds for an opportunity by obtaining small amounts of money from large groups of people, generally through internet sites designed specifically for this purpose. The internet facilitates crowdfunding through fundraising platforms, which, when leveraged with social media websites such as Facebook, Twitter and Linked-in are able to rapidly and efficiently attract vast numbers of potential investors resulting in successful fundraising campaigns for opportunities ranging from personal projects and social support to entrepreneurial ventures.
Crowdfunding, a recent phenomenon, has the potential to radically change the fundraising processes for individuals, non-profits and for profit entrepreneurial endeavors.
Crowdfunding can be utilized to obtain “Money for Goods”. Under this funding model donations are solicited for creative personal projects, social welfare projects/non-profits, scientific and research and to a lesser extent, “for-profit” projects. Monies obtained under this approach are generally categorized under one of the following three funding models:
- All or Nothing (AON)
Fund-raising pledges are pursued with a pre-determined minimum. If the minimum is not met, no money is collected. - Keep it All (KIA)
Fund-raising is pursued without a pre-determined minimum. All of the funds collected (less commission) are provided to the entrepreneur. Even if the entrepreneur has insufficient funds to meet the objectives, he/she has the discretion as to whether or not to refund the funds. - Bounty
Funds are raised for the purpose of creating a product or providing a solution to a particular problem (i.e.; a software bug). Funds are awarded when someone successfully provides the requested service.
Crowdfunding can raise equity or borrow money for entrepreneurial opportunities/business ventures. Under this model, crowdfunding platforms and social media websites are leveraged to expand the potential investor base providing significantly higher numbers of potential investors for entrepreneurial opportunities.
Currently, in the United States, the options here are somewhat limited as the processes generally continue to require “Accredited Investor” status and transparency. However, the regulators are reviewing current regulations based on the “Jobs Act” and some liberalization my result in expanding the pool of investors to include non-Accredited Investors use of the crowdfunding platforms and capabilities. The environment is dynamic and interested parties in all countries should monitor the environment on a continuing basis for change.
As described above, crowdfunding for equity and debt can be further defined as follows:
- Debt crowdfunding – The start-up borrows money which must be repaid, usually with interest.
- Equity crowdfunding – Equity is provided to investors for funds invested in start-ups raising funds.
- Property crowdfunding – Owners raising funds provide investors an interest in the underlying property.
- Other crowdfunding – Various structures generally unique to particular services, (i.e.; perqs, publication, or rewards).
Resources
Crowdfunding Professional Association
The Crowdfunding Professional Association (CfPA) is a 501 (c)(6) nonprofit trade organization that was established following the signing of the Jumpstart Our Business Startup Act (“JOBS Act”) in April of 2012. The association is dedicated to representing the Crowdfunding industry, engaging the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and providing the industry with education, a professional network, and tools that will accelerate the capital formation and ensure investor protection.
JOBS Act
The Full Text of the America JOBS Act posted on the White House website.
SEC Press Release (SEC Issues Proposal on Crowdfunding)
The Securities and Exchange Commission, (SEC) press release related to the commissions proposed rules on crowdfunding.
Proposed SEC Rule on Crowdfunding
The Securities and Exchange Commission, (SEC) proposed rules on crowdfunding.
