In a previous blog, we discussed some of the plusses and minuses of Title V of the JOBS Act which includes a crowdfunding component. We talked about concerns that the crowdfunding exemption would give rise to abuses of the law without adequate oversight. Let’s take another look at more of the specifics of this controversial part of the JOBS Act and see how it affects the entrepreneur.
Crowdfunding allows any company to raise significant capital (up to $1 million within a 12 month period) without having to comply with the registration process through the SEC. A company could have up to 2,000 individual shareholders and all the company would have to do is submit an Offering Circular to the SEC.
One of the key benefits of Crowdfunding is that it is an easy way to get start-up funds and it allows a company to raise money from unaccredited investors without the legal issues that often come up with these investors.
Crowdfunding Websites are on the rise. In January 2012, according to the North American Securities Administrators Association, there were less than 900 websites whose names included the word “crowdfunding”. Today, there are nearly 9,000 of them. Once equity-based crowdfunding laws are set (probably within a few months), there will be many websites upon which entrepreneurs will be able to raise crowdfunding dollars.
Crowdfunding makes it possible for good ideas that do not appeal to conventional investors to get financing from the crowd. Not only does crowdfunding provide money to start a project, it also secures evidence of support from potential customers. In addition, it contributes to word-of-mouth advertising. The entrepreneur uses websites to solicit small contributions from people who are not typical financiers.
The entrepreneur may also solicit pledges to back an idea that has no product or service attached such as artistic patronage. A threshold approach can also be used. If the threshold amount is not raised by a set deadline, all of the pledges will be voided.
So what’s the downside?
Idea Theft – When someone solicits crowdfunding, one of the requirements is to disclose the idea that needs funding. This exposes the idea’s owner to the risk of his/her project being copied by competitors who have better financing. If the competition releases the product before the entrepreneur’s funding can be raised, the owner of the original idea risks losing market share.
Crowdfunding may not be right for all types of ventures. If you don’t need millions of dollars in funding, and if you can use that funding to quickly create your product or service, crowdfunding may work for you. Conversely, if you need millions of dollars to develop a new technology that may take years of R&D, crowdfunding is not right for you since the return period is too long. In such a case, angel and venture capital investors are a better route.
Crowdfunding has the key advantages of being quick and easy to raise capital while also helping you build a customer base. There is a potential disadvantage of it exposing your idea to competitors and/or copycats. If you need funding, and have the ability to quickly turn the funding into a viable product or service, then crowdfunding may be for you.