Over the past few years, crowdfunding has been steadily climbing the charts of ubiquitous Internet buzzwords. It’s inclusion in last year’s JOBS Act only added fuel to the fire and on the surface seems to give a nod of legitimacy to crowdfunding as a source of business capital.
At first glance, it’s not hard to see the allure in harnessing the crowd to potentially raise significant amounts of money. But, if you were hoping that crowdfunding would bring the end to your financing woes, make sure you know all the facts. Raising money from this kind of model may actually not be an option for the vast majority of small businesses.
Up until this point, crowdfunding platforms have mostly subsisted on a perks-and-gifts model. This is the version popularized by Indiegogo and Kickstarter in which individuals donate their money in exchange for small gifts, honors, or products, but not stock.
In theory, the crowdfunding provision in the JOBS Act was supposed to allow ordinary investors the opportunity to invest in small or early stage start-ups online in exchange for company equity. The provision provides for entities to connect companies raising money with people who want to invest. These can be existing securities brokers, or they can be so-called “funding portals.”
Currently, only individuals who meet certain wealth or income requirements are allowed to invest in private companies in exchange for ownership. The Securities and Exchange Commission was tasked with creating the rules surrounding the proposed new form of equity-based crowdfunding, but the “final product” as part of the JOBS Act was so watered down and warped that it caused industry experts to proclaim “Investment Crowdfunding in the U.S. is Dead Before Arrival.”
In a nutshell, the resulting legislation on a federal level will do little to nothing to create a new capital market of non-Accredited investors nor help “formalize” and grow the friends and family funding market.
The good news, however, is that there has been a growing adoption of state-wide crowdfunding legalization. A handful of U.S. states have recognized the value of forging ahead with their own state-wide crowdfunding legalization, something they are allowed to do as long as the investors and businesses operate within their states. Georgia, Kansas, and Wisconsin have already signed off on crowdfunding legalization, and North Carolina and Washington have followed suit with their own proposals.
So where does that leave your small business? If you happen to live in one of the states mentioned above, and you are operating a small or early stage startup, then crowdfunding may be a viable financing option to look into. If, however, you live outside these states and your business is not related to the arts, your chances of drawing money from the crowd are pretty slim. Crowdfunding may not be your financing silver bullet after all.