Crowdfunding is a popular way to raise funds for projects and new products but you may not know that, since 2013, crowdfunding can also be used to raise money for businesses, thanks to a provision of the Jumpstart Our Business Startups Act, or JOBS Act. Here are 10 tips for using crowdfunding successfully.
KNOW THE TWO TYPES OF CROWDFUNDING. Crowdfunding sites like IndieGoGo and Kickstarter used to be exclusively for raising donations through pledges. Beginning in 2013, however, entrepreneurs can seek investments through crowdfunding.
KNOW YOUR LIMITS. As of April 2017, businesses can seek to raise up to $1,070,000 annually through certain qualified crowdfunding websites. Crowdfunding investors will have a stake in the company and can make money if the company succeeds.
KNOW YOUR INVESTORS’ LIMITS. Investments through crowdfunding are limited by regulation and in part are based on the financial strength of the investor. Depending on annual income and net worth, investment limits range from $2,200 to $107,000 annually, and those amounts are not for any single offering; they are an annual limit that applies to all crowdfunding investment offerings.
KNOW YOUR CROWDFUNDING OPTIONS. To crowdfund investments, businesses can only crowdfund an offering through one online platform. They must use websites with intermediaries that are broker-dealers or a funding portal that is registered with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). The site must conduct background checks on companies seeking investments and must screen investors to confirm that they understand the risks involved. Not all crowdfunding sites meet those criteria.
KNOW THE COST. While sites like IndieGoGo offer free crowdfunding for causes, there is a fee for entrepreneurial ventures. IndieGoGo charges five percent; others may vary.
KNOW WHETHER YOU QUALIFY. Some companies are prohibited from using crowdfunding including non-U.S. companies, companies that already are Exchange Act reporting companies, certain investment companies and companies that have failed to comply with the annual reporting requirements.
KNOW YOUR OBLIGATIONS. While businesses seeking crowdfunding below the annual limit do not have to register with the SEC, there are regulations that must be followed including reporting requirements and limitations on communications with investors and potential investors. Always consult with a professional investment consultant or a securities attorney before launching any crowdfunding venture.
KNOW WHAT INFORMATION YOU CAN SHARE. When businesses crowdfund investments, the SEC regulates how they communicate with investors. For example, advertising the terms of an offering anywhere other than the crowdfunding website is limited to a brief notice. More complete details can be provided on the website but must also meet certain requirements.
KNOW YOUR FOCUS. Within the SEC’s limits, create a compelling pitch that helps potential donors get them excited about your business, your product or service and your entrepreneurial passion. Focus on the bottom line and the potential for investors to make money.
KNOW THE REWARDS. For investors, one reward is the potential profit they make from your company. Another might be knowing that they helped contribute to the success of a small business enterprise. Remind your investors of the intangible benefits of taking a position in your company; for some, those could outweigh the additional money they might earn.
For more information on crowdfunding and growing your business, contact the Economic Development Collaborative-Ventura County. Conveniently located in Camarillo, California, we’re here to help.