A. Crowdfunding is raising money by asking a large group of people, usually through the Internet, to contribute or invest a small amount of money. Often, individuals use crowdfunding for a small project or endeavor, but businesses are starting to use it to raise capital for their operations.
Using the power of the Internet, crowdfunding can be a great resource for start-ups and young companies, as well as offering individuals and organizations the opportunity to invest in ideas at the early stages. Crowdfunding opportunities have also been broadened by the federal JOBS Act of 2012, which, among other things, allows businesses to raise capital from ordinary people.
For business, there are two major forms of crowdfunding: equity-based and debt-based.
· Equity-based crowdfunding allows companies to raise funds by selling shares of their companies to investors. By selling a portion of their company, companies only have to pay their investors when a business turns a profit.
· Debt-based crowdfunding allows companies to raise funds by selling their debt to investors. Debt crowdfunding makes it easier for a company to raise capital; debt investments are secured against the company’s assets and are seen as less risky for investors.
Q. How do I start crowdfunding?
A. Starting a crowdfunding campaign is the same as any other method of attracting investors – have a rock-solid business model, a clear business plan and budget, and an effective pitch. Potential investors need to know what they are getting in return for their investments and what their rights are as investors.
Where crowdfunding differs is in how the recruiting is done. Once you have a composed plan, you can distribute it through existing crowdfunding websites, which often have easy-to-use platforms that can adapt to meet your financial goals. With an already composed plan, many of the questions they ask should be easy to answer. Additionally, these platforms can help you seek out accredited investors (individuals with a net worth of at least $1 million or an annual income of at least $200k), which is required by law if you’re publicly crowdfunding your company.
Some of the most popular platforms for equity-based crowdfunding are CircleUp, CrowdCube and Crowdfunder. For debt-based crowdfunding, businesses should look at Funding Circle, LendingClub and Prosper.
Q. Are there any laws or restrictions I have to follow when crowdfunding?
A. The regulations for crowdfunding were released last month by the Securities and Exchange Commission (SEC). For the details, visit the SEC website at www.sec.gov.
Before you publically solicit funds, you must file “Form D” with the SEC. Once this is completed, there are two tracks a company must choose from: Tier I or Tier II.
· Tier I allows you to raise up to $20 million from both accredited and non-accredited investors. Companies are subject to formal review with state regulators, but are not required to perform formal audits and annual reporting.
· Tier II allows companies to raise up to $50 million from both accredited and non-accredited investors. Companies are not subject to individual state laws, but they are required to have audited financials and subjected to annual reporting requirements.
There are also limitations on the amount of securities investors can purchase, and they are different for both accredited and non-accredited investors for both Tier I and Tier II.
For more information: http://njbmagazine.com/trenton-talk/getting-started-in-crowdfunding/