Now that the dust has settled a bit on this thing called crowdfunding, more small businesses are starting to look at it as a viable alternative to traditional small business loans or funding from venture capitalists.
Wait, What is Crowdfunding?
When a company wants to raise money, such as to open a second location or add a product line, they can use crowdfunding to do so. That means that they post a project on a crowdfunding site like KickStarter and invite their network to participate.
Regular joes — folks like you and me — can donate to the cause. That could be as little as $5 and as much as, well, as much as you’d like to invest. In exchange, you don’t get your money back, but you do get some sort of thank you, such as the company’s new product once it’s released, or a t-shirt or other commemorative gift.
If you’re surprised people — some who never even heard of the company they’re funding — actually give money for this, don’t be. There’s a certain excitement that comes with being involved in something like this. Last year, actor Zach Braff raised over $3 million (when his goal was only $2 million) to fund a new movie. He didn’t want to go the traditional route of finding film investors, and as a result, created a legion of 46,000+ rabid fans.
Why Should You Use Crowdfunding?
The benefits of crowdfunding are appealing, and include:
- Sometimes making it easier to get funding than other avenues
- Doing so without a broker
- Not having to repay a loan
- Building a fan base through crowdfunding sites
Regulations are Becoming More Crowdfunding Friendly
While the SEC is still scratching its head on exactly how to regulate crowdfunded financial transactions, individual states like Alabama are taking measures into their own hands to encourage entrepreneurs and small businesses to take advantage of the tool.
If only it were as easy for the SEC. Despite the topic of crowdfunding being abuzz for the past two years on Capitol Hill, legislators still have not agreed on how to handle non-accredited investors (that’s people like you and me who want to invest in a company’s crowdfunding campaign) as financial resources.
There’s a new “Equity Crowdfunding Improvement Act of 2014” legislation being considered that would increase the amount a private company could raise under equity-crowdfunding from $1 million to $5 million. It would also increase the amount entrepreneurs could raise without providing audited financial statements from $500,000 to $3 million. Stay tuned to see if it actually goes through in the coming months.
Whatever the regulations bring, crowdfunding brings more options to entrepreneurs who need financing.