Worth reading if you’re considering investing in or using crowdfunding for your business.
Crowdfunding, is also known as hyper funding, crowd financing, and equity crowdfunding.
We think of social media as a marketing tool. But Chase Bank and LivingSocial have related it to crowdfunding. They offered 12 $250,000 grants that included social media services. Just to be eligible for the grants, they required applicants to prove that they have operationalized social media into their business model. The proof: get 250 facebook votes in a specific amount of time.
With help from our clients and colleagues we got 324 votes in three weeks. Not bad. And, thanks for your help.
Crowdfunding or crowd funding is defined in Wikipedia as “the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the internet, to support efforts initiated by other people or organizations.”
In 2011, according to a post by Sig Ueland, there were at least 13 websites dedicated to this new, supposedly less risky way to raise capital. He starts out his post about these websites saying “Who needs banks?”
Maybe with social media and crowdfunding he’s right. Chase certainly seems to see the writing on the wall and has joined the trend in its own way. Crowdfunding without the crowd “paying” for the grant directly.
More typical is the formula used by one of the best known crowdfunding websites, Kickstarter.com for creative projects. It seems to be a nicer, gentler Shark Tank®. It’s all-or-nothing funding. The person with the project sets the monetary goal. People pledge to fund the project. If the goal is met, the credit cards of those who pledged are charged. If not enough is raised, no one is charged.
Another player is the federal government. When the Jumpstart Our Business Startups, also known as the “JOBS” Act, passed on April 5, 2012, it also included limitations and obligations for intermediaries and companies, i.e. issuers, to follow. These are intended to protect the small investor but may drive up the costs to acquire this capital.
The U.S. Securities and Exchange Commission has warned that the Act requires intermediaries to follow specific obligations and rules that the SEC has been given the power to determine. It has approximately 270 days from enactment date to propose specific rules and methods to ensure that funding will actually take place. Jeff Jacobson, JD, LLM has written a great post on these issues, “Limitations on Crowdfunding Legislation”. I also recommend you watch the C-Span Hearing by the House TARP Subcommittee on these regulations to see how Congress views those proposals.
Word to the wise, don’t think that crowdfunding is a panacea. It’s not less risky for investors or entrepreneurs. But used carefully, it’s another funding tool that we badly need. Be watching to see how all this turns out and how it gets regulated. I know I will. The devil is in the details.
I do encourage you to buy and read The Crowdfunding Bible by Scott Steinberg or download it for free at his website.
Those who have control of the gold, make the rules. Maybe that’s a good thing. We’ll see,
What are your experiences with crowdfunding as an investor or as an entrepreneur?
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