Crowdfunding on the Rise
As the economy downturned, so did the access to capital that entrepreneurs once had. Luckily, there are other means to gain the needed investments through a combination of social internet, networks of friend, colleagues, and communities referred to as crowdfunding. It seems this new model used for building capital is keeping on the rise. Here are some important aspects to think about before taking the leap in crowdfunding your own venture.
The Crowdfunding Landscape
Since 2009, the growth of crowdfunding platforms has risen from an estimated value of $1.6 billion to $6.2 billion in generated revenue. Where is this money being found at? Here is a list of some of the top sites right now that have connected entrepreneurs with investors.
1. Kickstarter: Since starting in 2009, this site has raised $53 million for over 20,371 projects and claims no ownership over the projects or work produced. The only downhill is the projects goals much be reached in order to receive full funding.
2. IndieGoGo: Starting in 2008, millions have been raised on this site funding over 40,000 projects perfect for creative and cause related endeavors. Individuals can seek donations and keep the money pledged even if they do not reach their funding goal.
3. ProFounder: Launching in 2009, they have seen 250 projects funded with a total $350,000 raised. This site is specifically geared towards entrepreneurial projects with tools to help grow your business by reaching out through social networks.
4. FirstGiving: This site has been around since 2003 and seen a billion dollars raised for over 8,000 projects. Mostly focused on providing nonprofits and individual supported with the tools to fundraise for their cause of choice.
How it all Started
Legislation has been introduced that allows individuals to now use crowdfunding without the need to register the public offering with the SEC. This is all thanks to the case that went to Washington regarding an attempt by two marketing executives to raise money to buy Pabst Blue Ribbon Brewery by creating a domain that people could invest money in the company through. After just seven months, the executives were able to raise $200 million by nearly 5 million fans. However, in 2011 the SEC ordered them to cease and desist for failing to register their offering.
Crowdfunding Legalities
With this new legislation, an unlimited number of people are allowed to contribute versus the 499 limit currently allowed as the total number of shareholders of privately traded companies through the SEC. These individuals can contribute up to a total of $5 million for a start-up. However, individual contributions are capped at $10,000 each or 10% of their overall income.
Through President Obama’s “America Job Acts,” the goal for small firms to access capital and expand is hopeful as the red tape is cut on reducing regulatory limits on how start-ups and small businesses gain their capital. It is expected that the future will bring more crowdfunding options and mini offerings.
Pros and Cons
Pros: Crowdfunding offers and alternative solution that makes it a more affordable option to raise money with low risk for investors. Through using these communities, crowd feedback is promoted.
Cons: The largest downfall here is the minimal protection given to investors for fraud or scams. It may also be difficult to raise the desired amount of funds in a short time. Lastly, place your business plan out there can put you at risk for idea stealing.
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