In this post, I would like to summarize the information I
posted previously about crowdfunding and discuss the kind of company or
individual that would benefit the most from this type of financing. In the
donor-based model of crowdfunding, it would be a person or a team with a
creative novel idea, something that would make people donate their money to
support the idea. It is unlikely that a commercial product or service would get
substantial financial backing from donors. After all, donors are not getting
any interest in the company. Therefore, it is likely that the most popular
projects will be those in the creative field (arts, film, books, etc.).
A start-up looking for seed funding can (and would be well advised to) reach
out to their friends and family through an investment-based crowdfunding
platform. The advantages include low cost of structuring the investment, the convenience
of an internet-based platform to conduct the offering and the ability to raise
sizable amounts of money. The disadvantages include (1) limited universe of
potential investors (limited only to people with whom founders have
pre-existing relationship); (2) legal risks (if founders do not hire attorneys
to guide them through the blue sky and federal filings); and (3) limit on the
type of investment possible (if the platform offers only one kind of investment
Is crowdfunding a viable option of financing for an already existing business
with a multi-million dollar revenue that needs capital for expansion? Platforms
like Kickstarter or RockerHub will not be good sources of revenue, as the
donors will lack the incentive to donate money to an existing and profitable
business. A site like Profounder may not be a good option either, as such
platforms tend to be focused on seed capital raises: for example, Profounder
specializes in friends and family rounds of investing with an average amount of
money raised per company of about $35,000 to $60,000. An established company
with multi-million dollar revenue will probably need to raise more money than
that, and from accredited or institutional investors. Also, a big company may
need to consider the number of investors it wants to attract, if it does not
want to trip the 500 shareholder rule. So, a crowdfunding model of investment,
where many people contribute or invest small (or relatively small) amounts of
cash, may not be the best option for it.
In the next (and final) post about crowdfunding, I will discuss some legal
developments in the securities law field related to crowdfunding.
Read more commentary from Arina Shulga on the
legal aspects of operating new and growing businesses at Business Law Post.
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