One of the largest challenges entrepreneurs face is getting funding for their great ideas. Women business owners struggle in spite of efforts by the government to create SBA and micro loan programs to help entrepreneurs’ access capital. The challenge is that even the SBA requires good credit, collateral, and an income source to repay the loan. If you are starting a company without those things your only option is typically to borrow money from friends and family or to work with Angel Investors. That too can be an often challenging and long process. Fortunately now there is an alternative – crowdfunding.
Crowdfunding is a viable option for raising capital for your startup company. With the passage of the JOBS Act Congress made it possible for companies to raise capital from everyone, not just Accredited Investors. Currently the SEC is working on the rules that will regulate crowdfunding and they have been accepting public comment as part of that process. Once complete companies will be able to sell shares online in a investment for equity model.
Many don’t expect the SEC to be done before 2014. In the meantime, an excited public and driven entrepreneurial community has found a way to make crowdfunding a reality. As an entrepreneur, you can create a crowdfunding campaign on a portal like Kickstarter or IndieGoGo and people can contribute to that campaign. There are very specific differences you need to be aware of in order to avoid any securities violations:
- Backers not Investors. People that give you money through a crowdfunding campaign will be “backing” you, not “investing” in you. There is a big difference. Backers do not receive an equity stake in your company.
- Awards not Shares. When backers give you money, they receive an award instead of a stock certificate. For example if you are a shoe company you could give them a pair of shoes. The awards can be both tangible and intangible but must be clearly stated in your campaign.
Crowdfunding campaigns are ideal for companies that have a tangible good to sell. You don’t have to own the inventory either. Many campaigns have been launched with backers participating in the final design process. This can make the crowd more excited to support you. From a financial perspective crowdfunding can be similar to taking pre-orders of your product, art work, or book while taking payment at the time of order. In this sense, it is more beneficial financially than obtaining a loan or seeking investment capital. Not only are you getting your business off of the ground but you are establishing a base of customers, as well. Just make sure to stay clear of “selling equity” until the SEC has issued their final ruling.