For a quick overview on how crowdfunding for businesses will work and the history behind the JOBS Act and the business/equity crowdfunding market, see our Business Crowdfunding Infographic
Crowdfunding occurs when many donors collectively pool their small contributions together to raise a larger sum of money for a single project or company.
Any entrepreneur can post his or her project online and have access to millions of potential investors. Crowdfunding, as opposed to most other capital markets, does not require a bank or underwriter to facilitate the process.
A crowdfunded project can be of creative nature, a charitable cause, or in the case of crowdfunder, a business venture that offers contribution, equity or revenue sharing to those who contribute funds.
Funds can be raised by a startup or business via crowdfunding in several forms. They each differ in the way the “investor” participates in the company and is rewarded for his or her “investment. Below are the most notable crowdfunding models:
• The Donation Model – funding comes solely as donations, thus investors receive no ownership or any other returns against their donation
• The Reward Model – investors receive an agreed-upon reward – often the service or product that the crowdfunded company sells. Sometimes said reward translates into public acknowledgment, as in movie credit
• The Debt Model (Peer-to-Peer Lending) – companies seek money in the form of loans from a crowd of lenders who each agree to lend money at a given interest rate
• The Equity Model (Business Crowdfunding) – companies offer investors a share of profits and/or of ownership in the form of equity stake. Investors do not need to be accredited to participate, and companies are not required to register with the SEC before issuing their offering.
The History Of CrowdFunding
Crowdfunding first appeared as collaborative and social features were adopted across the Internet. Two significant crowdfunding milestones:
2000: British rock band Marillion emailed their database of over 30,000 with an offer to pre-order their next album before the band even entered a studio. In less than 3 weeks, 12,000 dedicated fans signed on so that Marillion collected enough money to record their album while retaining all rights to their music. Marillion relied once more on crowdfunding for their next album, which received 18,000 pre-orders.
July 2011: A notable business-crowdfunding round takes place internationally. The small French website Paysans.fr (Peasants.fr), an organic produce delivery service, raised $140,000 from 30 of its own subscribers in exchange for company equity. The experience was positive enough that a second offering occurred in October 2011.
The Current State Of Business Crowdfunding
2009: Gartner estimates that crowdfunding platforms raised $1.6 billion
In the U.S., crowdfunding a business in exchange for equity and potential returns is illegal under the Securities Act of 1933. Michael Migliozzi and Brian Flatow learned this much when they attempted to buy the Pabst Blue Ribbon brewery by soliciting pledges from the public. In less than 7 months, 5 million Americans had promised to invest $200 million. In June 2011, the SEC sent Migliozzi and Flatow a cease and desist letter for failing to register the offering.
The Future Of Crowdfunding
2013: Crowdfunding sites are expected to raise up to $6.2 billion in 2013
Following the SEC decision, Congressman Patrick McHenry introduced Bill H.R. 2930 or Entrepreneur Access to Capital Act, to amend the outdated securities law. The bill, which passed the House with a 95% majority and is under consideration by the Senate, lifts several legal limits that currently prevents businesses from offering shares to individual investors.
The economic benefits of crowdfunding have become obvious to all and no less than three other related Bills are being reviewed. President Obama has pledged to sign a crowdfunding bill into law as soon as it reaches his desk. During his State of the Union in January 2012, President Obama renewed his commitment to crowdfunding:
“Most new jobs are created in start-ups and small businesses. So let’s pass an agenda that helps them succeed. Tear down regulations that prevent aspiring entrepreneurs from getting the financing to grow. […] Both parties agree on these ideas. So put them in a bill, and get it on my desk this year.”
What Are The Current Crowdfunding Options For A Business?
With several bills in the U.S. Senate aimed at enabling businesses to raise funding in exchange for equity, the crowdfunding revolution has a strong chance of becoming a reality.
As an entrepreneur, this could mean greater access to capital for your business or startup from an even larger crowd of potential investors that populates the “donation” model or lending space today. Being able to crowdfund your business for debt or equity gives you more flexible financing options than the traditional banks do. The same banks which have have recently slowed lending to small businesses everywhere.
As a crowdfunding investor, you now have a more level playing field and equal opportunity to participate in the “Wealth Creation Cycle” that stems from being an owner/lender of capital to high growth companies. Imagine if you had the opportunity to fund the next Facebook, Zynga or Starbucks?
Don’t stay on the sidelines. Get involved!
If you start connecting now with the growing number of people waiting to become investors and/or to fundraise for their company, you’ll be able to capitalize on the new market that will be created as soon as the new crowdfunding laws pass in the U.S.
Reach out now to the people you’d want to help fund your company, or to those in whom you’d like to invest in by joining crowdfunder.com