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What is Crowdfunding? (and how can it help your startup?)

Crowdfunding is an innovative way to raise money for a project by pooling small contributions from a large number of people.

It’s a simple idea that – when combined with the reach of the Internet – can lead to profound consequences. Barack Obama’s unlikely 2008 campaign was largely paid for by small contributions to his online crowdfunding machine. And Kiva.org – a crowdfunded micro-lending site – has helped over 1.9 million low-income entrepreneurs and students get small loans.

Crowdfunding has also helped thousands of small businesses and startups raise seed capital and fund projects via sites like Kickstarter.com and Indiegogo.com. These sites allow individuals to raise funding for a project from supporters all over the world. Until recent changes in federal securities laws, crowdfunding contributions were in the form of a contribution, a donation or a pre-purchase of a product.

What Crowdfunding can mean for your startup

For some startups crowdfunding may be necessary to bypass the angel and venture capital funding process. For example, in 2012 Pebble, a high tech wristwatch company, raised over $10 million via a crowdfunding pre-production product sale campaign after failing to raise enough venture capital funding to develop their product.

In the past an entrepreneur would be forced to convince one of a small number of bankers or venture capitalists to back their idea. Today startup founders can reach people all over the world via email and social media. They can ask people they have never even met to contribute to their project in one of several ways.

Online crowdfunding campaigns can also benefit startups in the form of word-of-mouth marketing and high-speed customer feedback about product features and design.

The future may be “equity based” crowdfunding

In 2012 Congress passed the Jumpstart Our Business Startups “JOBS” Act to make it easier for startups to raise certain types of capital. The Crowdfunding exemption of the JOBS Act reworked some existing securities regulations around “Equity-based” crowdfunding.  The regulations for this Equity based Crowdfunding securities exemption are out and will become effective on May 16, 2016.

Equity crowdfunding will soon allow individuals to actually purchase an equity stake in a business. Because of the risk involved here, this type of investment is highly regulated. But there is great potential for certain startups to use the new equity based crowdfunding rules.

There’s more coming!

We will be covering Equity-based Crowdfunding and other JOBS Act changes in more detail in future articles. For now, it is enough that you understand the power of crowdfunding and the coming potential of equity based crowdfunding.

If you have any questions about the legal implications of raising money via crowdfunding, please give us a call. We are here to help you.

The content presented in this article is for general informational purposes only. It is not, nor is it intended to be, legal advice. It does not constitute the formation of an attorney-client relationship. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

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