The crowdfunding phenomenon took flight around 2008, and since then over $35 billion has been invested into creative ideas by people eager to get in on the ground floor of an exciting new product or concept.
Title III of the Jumpstart Our Business Startups Act (JOBS Act) established provisions for crowdfunding that allowed startup businesses to offer and sell securities. The Securities Exchange Commission adopted Regulation Crowdfunding to implement these provisions, and the new rules took effect on May 16, 2016, allowing the general public to invest in business startups—whereas before only accredited investors could finance news businesses.
All the hoopla and all that money is motivating more and more small businesses to jump on the crowdfunding bandwagon and cash in on what appears to be an amazing opportunity, which it can be if you are mindful of both its advantages and disadvantages.
Crowdfunding: The Advantages
- Cheap and easy way of raising money: There is no cost involved in donation-type crowdfunding like Kickstarter, and even the debt crowdfunding models like Lending Club are less expensive than getting a bank loan or working with a finance company.
- Less strict guidelines: Banks and other lenders have strict guidelines that prevent them from loaning money for ‘experimental’ or unusual product or business ideas. Crowdfunding enables you to turn your unique ideas into a potentially profitable business by making it easier to acquire funds.
- It’s a free marketing campaign: Crowdfunding helps you create awareness about your product or business, and campaigns that are especially popular often make headlines that arouse consumer curiosity and interest. This exposure maximizes the likelihood of a successful product launch in the future.
Crowdfunding: The Disadvantages
- Comparatively low success rate: Despite all the hype surrounding crowdfunding and its unlimited potential, the reality is that out of 100 projects, maybe one or two receive enough money from the public to succeed. This low success ratio means that you could exert a massive fundraising effort and get little in return.
- Your idea becomes public knowledge: When you post your idea on a crowdfunding site, it immediately becomes public knowledge, and you run the risk of someone stealing it, using a savvier business approach, and profiting from it before you can. To prevent this possibility, protect your idea by trademarking it or taking out a patent.
As you can see, crowdfunding has revolutionized the way that entrepreneurs and businesses raise startup capital, but it has strong advantages, disadvantages, and limitations. Successfully navigating the complexities of this innovative financing platform requires you to be experienced in several disciplines, such as financial services, securities, and taxation.
Attorneys Yonatan Levoritz and Steve Krishtul at the Levoritz Law Group are seasoned business attorneys who understand the process and implications of crowdfunding. They can help you remain compliant with applicable laws including the JOBS Act and Regulation Crowdfunding, ensuring that your business has no issues when raising capital and carrying out these transactions with the public.
For experienced advice in initiating and running a crowdfunding campaign, contact the Levoritz Law Group today.