By Karen Axelton
Have you used crowdfunding to raise capital for your business, or have you considered it? The JOBS Act signed into law by President Obama on April 5 creates new potential for entrepreneurs to raise money via crowdfunding—but also adds new levels of complexity.
According to crowdsourcing.org, global crowdfunding raised some $1.5 billion in 2011. Prior to the JOBS Act, crowdfunding sites were only able to solicit donations from contributors—not investments. Because these were donations, they were typically small amounts. A crowdfunding provision of the JOBS Act changes that, allowing small business owners to raise investments (up to $1 million per investor) via crowdfunding websites.
As of July 4, you will be able to crowdfund from “accredited investors” (whose net worth, excluding the value of their primary residence, is more than $1 million). But the SEC still has to put final regulations in place as to how entrepreneurs will be allowed to solicit crowdfunding from nonaccredited investors.
The SEC is expected to release these regulations in January 2013. What can you do in the meantime? Use the intervening months to educate yourself about crowdfunding and the various platforms for doing so. One estimate puts the number of active crowdfunding sites at more than 450, and that number is projected to increase by as much as 25 percent by the end of the year.
Some of the benefits of crowdfunding as opposed to seeking financing from angel investors or venture capitalists:
- It allows you to tap into a market of interested, non-professional investors who are also likely to be customers of your product.
- You will be able to raise money from people you know even if they aren’t accredited investors.
- You can raise capital for creating a prototype or market-testing your product before launching it.
- Unlike traditional capital-raising, crowdfunding also creates public awareness of your business, serving as a marketing tool.
Of course, crowdfunding investments is not a simple process, and you will need to enlist legal and accounting help from someone familiar with the process. In the meantime, some existing crowdfunding platforms to check out include SomoLend, Indiegogo, Kickstarter and Peerbacker. You can learn more about crowdsourcing in general at www.crowdsourcing.org.
Image by Flickr user Karen O’D (Creative Commons)