By Edward DuCoin
Crowdfunding is a way to allow people without much money to 'get in on the ground floor' and to provide funding to a new business venture. In exchange, the small investor hopes for a good return on the money invested. For investors with less than $100,000 annual income (or net worth), current rules allow no more than 5%, up to $2,000 invested in this way. If the income (or net worth) is over $100,000, the limit is 10%, unless the investor is an accredited investor.
Crowdfunding is a way to allow people without much money to 'get in on the ground floor' and to provide funding to a new business venture. In exchange, the small investor hopes for a good return on the money invested. For investors with less than $100,000 annual income (or net worth), current rules allow no more than 5%, up to $2,000 invested in this way. If the income (or net worth) is over $100,000, the limit is 10%, unless the investor is an accredited investor.
In the past
year or two, firms offering crowdfunding have grown exponentially.
Recently
relaxed disclosure rules allow for information to be offered through forums as
casual as Facebook, Pinterest, LinkedIn, and other social media sites.
The Good
In the past,
well-heeled, well-funded venture capitalists, many if not all of whom were
registered investors, would choose which risky ventures to fund. The chance of
losing part or all of the investment is quite real in the world of venture
capitalists; this is part of the reason most people never get involved in such
investments to any serious degree.
The next
door neighbor's kid selling stock in Junior Achievement comes to mind, and the amount
has traditionally been low enough that nobody really cared if the money went up
in smoke. It was to provide an educational experience for the kids, anyway, and
the investment was less than a steak dinner for two at the neighborhood dining
establishment.
The amount
of regulation, research, oversight, and policing authority for most securities
is pretty substantial. For small business ventures with no track record, the
cost of starting operations can be overwhelming.
Obtaining
bank financing often requires the entrepreneur to pledge his home as
collateral, and getting the loans can still be quite difficult. An Initial
Public Offering (IPO) can require more expense, time and delay than many
hopeful business owners can afford.
The vast
majority of small business startups do not succeed. One of the biggest reasons
is the lack of sufficient operating capital, closely followed by lack of
expertise in managing what cash flow is available, along with marketing,
competition, putting together a team of employees, dealing with regulations,
taxes, and all the rest.
The Bad
·
Crowdfunding
shares may be sold through a 'funding portal' or a registered broker-dealer,
but both are prohibited from rendering investment advice to the purchaser, or
offering sales-based compensation to those who conduct the transaction.
·
Total
funds raised via crowdfunding are restricted to $1 million or less. Regulations
are not yet fully decided, so no one really knows what future regulations may
be. Regulations are loose, but the lack of policing power is practically
non-existent, so the possibility of someone simply spending all the money or
using it in and unskilled or inappropriate way, with little or no recourse for
the investor, is quite real.
·
The
non-accredited investor is prohibited against selling his or her shares for one
year.
·
A
million dollars sounds like a lot of money, and it is. However, the amount of
money required to launch a successful business is frequently underestimated.
Many expenses both large and small must be met. Investment precedes revenue
nearly 100% of the time so a million dollars can be used up before the business
gets off the ground. The hidden danger is that the crowdfunding might raise
several hundred thousand dollars, and that could make the apparent net worth
vs. cash flow of the new business too high for a real IPO
to be mounted.
So, the new
company is in imminent danger of failing due to lack of funding before the
investors can sell their shares. Remember, many of these shares are promoted in
rather casual ways, and current regulation allows the promoter to escape the
scrutiny other investment providers would face, if the information isn't
correct.
Does this
sound like a prudent investment for an investor who probably doesn't really
know what he or she is doing when the investment is made? Unless I'm investing
in my brother in law, count me out.
Top Crowdfunding Sites
If you're looking to acquire money through crowdfunding, or want to invest in a small start up, there are three top sites that have been proven not only trustworthy, but successful as well.
1. Kickstarter (focused on creative projects and steers away from businesses and personal finance goals)
2. indiegogo (more tightly focused, with everything needing approval, covering mostly anything except investing)
3. Crowdfunder (more targeted at businesses, start ups, and social enterprises)
Top Crowdfunding Sites
If you're looking to acquire money through crowdfunding, or want to invest in a small start up, there are three top sites that have been proven not only trustworthy, but successful as well.
1. Kickstarter (focused on creative projects and steers away from businesses and personal finance goals)
2. indiegogo (more tightly focused, with everything needing approval, covering mostly anything except investing)
3. Crowdfunder (more targeted at businesses, start ups, and social enterprises)
