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What it is: Crowdfunding is about
persuading individuals to each give you a small donation -- $10, $50, $100,
maybe more. Once you get thousands of donors, you have some serious cash on
hand.
This has all become possible in recent
years thanks to a proliferation of websites that allow nonprofits, artists,
musicians -- and yes, businesses -- to raise money. This is the social media
version of fundraising.
There are more than 600 crowdfundingplatforms around the world, with fundraising reaching billions of dollars
annually, according to the research firm Massolution.
How it works: The most common type of
crowdfunding fundraising is using sites like Kickstarter and Indiegogo variety,
where donations are sought in return for special rewards. That could mean free
product or even a chance to be involved in designing the product or service.
It is also possible to use crowdfunding
to assemble loans and royalty financing. The site LendingClub, for example,
allows members to directly invest in and borrow from each other, with the claim
that eliminating the banking middleman means "both sides can win" in
the transactions. Royalty financing sites appear to be more rare, but the idea
is to link business owners with investors who lend money for a guaranteed
percentage of revenues for whatever the business is selling.
The holy grail is to sell company shares
or ownership stakes in the company on crowdfunding sites, because it could be
like a mini-IPO without the traditional hurdles. In the past, this has only
been legal with accredited investors, people who each have more than $1 million
in net worth or more than $200,000 in annual income.
The good news is that the Jumpstart Our
Business Startups Act of 2012 allows stock to be sold to the general public
over crowdfunding sites, but as of mid-2013, the SEC was still hammering out
the rules.
Read more: http://www.entrepreneur.com/article/228125
