What is Crowdfunding?
This year, the SEC promulgated new rules allowing for less sophisticated investors to have an opportunity to invest in companies through crowdfunding. Regulation CF was released late last year and went into effect May 2016. This is an exciting new area of equity and finance that has the opportunity to overturn the conventional wisdom of company ownership and growth.
Crowdfunding is the use of small amounts of capital from a large number of investors to finance a business venture. Businesses new and old can utilize crowdfunding for funding various needs. Crowdfunding allows many less sophisticate and smaller investors to take part in equity ownership. Under other equity ownership offerings, investors must often be what is called ‘accredited.’ An accredited investor is one who has a higher net worth or higher level of understanding and sophistication of equity ownership than the average individual.
Other forms of crowdfunding include debt offerings and donation based offerings. Debt offerings are when investors contribute to your project on the terms of an agreed return in the future. Sometimes these can be converted to equity on the investors option. Donation based crowdfunding is where investors contribute to a project in exchange for a tangible, non-monetary reward like a CD or t-shirt. Depending on the goals of your business and the type of product or service promoted, equity, debt, or donation crowdfunding can each offer unique advantages for raising capital.
Business wishing to use crowdfunding to raise capital must use an approved crowdfunding portal. The portals are registered and regulated by the SEC. The portals have the responsibility to ensure that the statutory investing limits and equity provisions are correct for all offerings. The portals will provide the technology platform for the offering and helping to ensure an offering meets all laws and regulations.
Crowdfunding offers another strategy for startups and other small/medium sized businesses seeking capital to grow to the next level. Often this includes introducing a new product or service for your customers and clients to become excited about. Crowdfunding can also be valuable to a business for marketing and research. A popular product or company in a crowdfunding offering can provide validation of a concept and even a sandbox testing ground for marketing and PR strategies before the product is actually launched.
In the following years, crowdfunding will become mainstream for small and medium sized businesses seeking capital. As traditional banking and capital markets shrink, new disruptors such as crowdfunding will begin to become important for every business. To learn more about how crowdfunding can help your business grow, call Reidel Law Firm today at (832)510-3292 or use the email button below.