By Attorney Ajay K. Singh of Hunter Business Law
Crowdfunding has been gaining in popularity over the last few years and when most people think of crowdfunding they think of sites like KickStarter or Indigogo. However, those sites are only a very small piece of the entire crowdfunding picture especially with the recent implementation of certain laws that are poised to dramatically alter crowdfunding in many different ways.
This is the first of four blogs that I am writing about crowdfunding and in these four blogs I will address the following items:
1. What is crowdfunding and what are the four types of crowdfunding used today?
2. Why is equity crowdfunding a game changer when it comes to raising capital as a startup company?
3. What do you need to do to be able to raise capital as a startup company through equity crowdfunding? Part I
4. What do you need to do to be able to raise capital as a startup company through equity crowdfunding? Part II
Let’s dive in!
What is Crowdfunding?
Crowdfunding can be loosely defined as the practice of funding a project or venture by raising monetary contributions from a large number of people, typically through the internet.
While that is a general definition of crowdfunding it really does not do this concept much justice because crowdfunding is much cooler and broader than what I just mentioned. To me crowdfunding is all about opening up opportunity to the masses both in terms of being able to raise capital if you are a startup company or invest in a company if you are an individual investor. Just like UBER is disrupting the traditional market of transportation, crowdfunding is disrupting the traditional markets of investment and capital raising.
There are four general types of Crowdfunding that are in existence today:
1. Donation Crowdfunding – This type of crowdfunding has been around the longest. This category of crowdfunding is mainly comprised of charities, non-profits, projects, and individuals who are seeking donations from funders who are interested in supporting the particular cause that the organization is focused on. An example of a donation crowdfunding site is Gofundme.com
2. Rewards-Based Crowdfunding – This type of crowdfunding is one of the most popular forms and is the most common form of crowdfunding these days. In rewards-based crowdfunding, individuals pledge an amount of their choosing to a particular project or company in exchange for gifts or rewards. A common gift or reward offered by companies in rewards-based crowdfunding is their product or service in exchange for a pre-set contribution amount from an individual. Rewards-based crowdfunding is quite popular with tech product companies. An example of a rewards-based crowdfunding site is kickstarter.com
3. Debt-Based Crowdfunding – This type of crowdfunding is also commonly referred to as crowd lending and basically allows companies or individuals to get a loan from an investor or group of investors. Typically the investor or group of investors lend the company or individual a specific sum of money in exchange for a binding commitment to repay the principal amount plus interest. Basically, debt-based crowdfunding is an opportunity to get access to funds in the form of a loan that you could not otherwise get from a traditional bank. Loans associated with debt-based crowdfunding also typically have lower interest rates than traditional bank loans. This type of crowdfunding is often confused with equity crowdfunding however it is distinctly different in many ways although many of the regulations associated with equity-based crowdfunding are also applicable to debt-based crowdfunding. An example of a debt-based crowdfunding site would be lendingclub.com
4. Equity-based Crowdfunding – I will go into much more depth on this form of crowdfunding in future posts, however the general concept behind equity-based crowdfunding is when an investor or group of investors invest a specific sum of money in a company in exchange for an ownership interest (equity) in the company. This form of crowdfunding has been around since the Jump Start Your Business Startups (JOBS) Act was passed in 2012. There are multiple types of equity crowdfunding that are governed by different parts of the JOBS Act, the latest being Title III of the JOBS Act which was approved by the SEC on October 30, 2015. Stay tuned for my next blog on this topic as I will dive much deeper into equity-based crowdfunding.
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