Types of Crowdfunding

Alternative Financing Options-  Types of Crowdfunding

Because of severe market failure during and after the Great Recession related to bank lending for small business and franchise development, crowdfunding has grown considerably over the past 5 years. Crowdfunding is the process by which individuals pool money to fund businesses and projects.  Crowdfunded activities can include artistic projects and new inventions.  And crowdfunded activities can include raising capital for new business ventures.  Crowdfunding generally takes place via an online portal that manages the financial transaction and may also provide support services.  Generally, there are four (4) types of crowdfunding activities.

 

Gift or Donation Crowdfunding

Donation crowdfunding is generally used for charities or personal concerns and causes. Donation crowdfunding has gained in popularity in recent years with GoFundMe and Indiegogos Generosity platforms. As the name indicates, individuals give to causes and people without expectation of repayment or reward.  Additionally, platforms like Gift Starter are revolutionizing social sales and e-commerce enabling large numbers of online patrons to pool funds to purchase gifts for colleagues, friends and loved ones.  The application of gift crowdfunding to e-commerce has the potential to be a game changer for traditional e-commerce.

Reward

Reward crowdfunding is the most popular crowdfunding model to date.  Kickstarter is the most recognized crowdfunding platform associated with the reward model.  Reward crowdfunding allows individuals to fund creative, social and entrepreneurial projects. People contribute to projects and receive non-financial rewards generally pursuant to a tiered system.  Under the system, the more you donate, the better the reward. Donations often exceed the value of the rewards.  Sometimes, the reward is like a pre-sale agreement that helps defray costs of production and in exchange donors will be the first recipients of the product.

 

Equity or Investment Crowdfunding

Equity crowdfunding involves investing for equity or profit revenue sharing in a  business or project. The U.S. regulatory agency overseeing this activity, the Security and Exchange Commission released revised rules on equity crowdfunding on October 30, 2015.

The Jumpstart Our Business Startups Act or JOBS Act, is a law intended to encourage small business funding by easing various securities regulations.  It passed and was signed into law by President Obama on April 5, 2012.

“For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” President Obama said when he signed the legislation, known as the JOBS Act, which is intended to let companies raise small sums online from investors without complying with the full set of securities laws that typically apply to private fund-raising. For purposes of crowdfunding, the JOBS Act has three sections that should be discussed:

1. Title II Accredited Investor Crowdfunding overturned 80 years of securities law and for the first time allows a private company to raise an unlimited amount of money, online, by generally soliciting  only to accredited investors.
2. Title III -Equity Crowdfunding  rules just released.  Allows individuals to invest in private companies much like a Kickstarter campaign.  A company can raise up to $1 million.
3.  Title IV  Regulation A+ or the Mini-IPO provides for the first form of equity crowdfunding and allows a private company to raise up to $50 million in a truncated form of an IPO online.
Kendall Almerico and Kim Bonner discuss new developments in equity crowdfunding and the opportunity for companies to offer and sell securities to the investing public starting May 16, 2016.
 Equity crowdfunding is seen as a game changer for democratizing investment in businesses and an advance in modern capitalism.  Several equity crowdfunding platforms have been developed.  This approach to crowdfunding is not right for every business.  However, this may be perfect for a franchise system that has reached a certain level but wants to significantly expand quickly and have an international footprint.  Equity crowdfunding may also be a fit for large multi-unit franchisees or master franchisees that are seeking substantial growth and expansion.  Equity crowdfunding is not cheap and should only be used by businesses with the right structure, legal, accounting and capital resources to support it.

 

Debt or Lending Crowdfunding

Crowdfunded lending is basically peer to peer lending. Companies such as LendingClub and FundingCircle are associated with this type of crowdfunding activity.   Businesses seeking funding apply to these platforms uploading critical business information and the crowd covers small aspects of the loan.  This type of crowdfunding would be ideal for a franchisee or start-up franchise systems to help defray initial costs.  This is a particular fit if the loan is less than $300,000.

 

New Day Consulting Systems, LLC can help you determine which crowdfunding approach is best for your business.  Our crowdfunding consultants are connected with some of the leading thinkers and innovators in crowdfunding in the U.S.  Call a crowdfunding consultant today and get your business or product funded.

Call or e-mail us today to set up a free consultation on crowdfunding.

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