Crowdfunding is a method of raising funds for a business
venture or a project by requesting a small amount of money from a large number
of people (typically through the Internet). An average amount of money raised
is between $2,000 and $10,000.
Crowdfunding is not a new phenomenon. We have seen it used by charities doing
fundraisers, politicians, asking for contributions to their political campaigns
(during his campaign for the US presidency, Barack Obama raised $137 million
from small donors), and musicians accepting contributions from their fans for a
We now see proliferation of crowdfunding because of the advance of social
networks that have enabled people to reach out to their communities and
networks more effectively. Over the past five years, users of websites like
Kiva & Kickstarter have "donated" over $350M to crowd fund projects
including art, films, software development and books.
In my opinion, there are several models or approaches to crowdfunding. First,
platforms like www.Kickstarter.com offer the opportunity to raise money that is
not directly repaid. Recipients instead may offer their contributors a
specified item or service in exchange for contributions, such as a free sample
of their product or an advance copy of their CD. Since investors do not expect
a return on their investment, the contributions are not securities, and
therefore no securities laws issues are raised. Examples of these platforms include www.rockethub.com, www.peerbackers.com, www.indieGoGo.com, www.crowdrise.com.
The second category consists of platforms that enable founders to solicit and
receive funds in exchange for some expectation of return (profit sharing,
equity). In this case, founders issue securities, and have to be very careful
about compliance with applicable federal and state securities laws. A good
example of such platforms is www.Profounder.com.
The third category includes companies that use internet platforms and
crowdsourcing/crowdfunding methods to actually produce products. The example I
want to use here is www.quirky.com, but there may be other similar sites out
Category One: Donation-Based Crowdfunding
Below is a brief overview of some of the platforms offered in the first
category where contributors do not expect any return on their investments.
1. Kickstarter (www.kickstarter.com)
Kickstarter is a platform that prefers to get funding for ideas or projects
rather than companies. They offer an "all or nothing" funding: in order to
receive the funds, a project must reach or exceed its funding goal or no money
changes hands. Once the project is announced, pledges can be made by credit
card (through Amazon processing), but contributors only need to pay if the
project meets the funding goal within the allocated time (1-90 days).
Recipients are expected to offer rewards to the contributors. Kickstarter
charges 5% of the amount received on successful raises and Amazon charges 3-5%
credit card processing fee. Although typically people raise up to $10,000, I
have also seen raises of over $900,000.
2. RocketHub (www.rockethub.com)
RocketHub is a platform that, similarly to Kickstarter, supports the community
of "independent artists and entrepreneurs". It is not limited to creative
projects, but encourages them. The platform offers an opportunity to raise
money as well as to "take creative products and endeavors to the next level",
referred to as "LaunchPad Opportunities" that allow community to discuss and
vote on the presented ideas. I liked the language they use: all who initiate
fundraising are called "creatives" and those who donate money are called
"fuelers". Participants also receive virtual badges for their contributions to
the site. RocketHub charges 4% of the money raised if the financial goal is
reached. If it is not, then the fee goes up to 8% of the total funds raised.
This is done to encourage creatives to set realistic funding goals. There is
also a 4% transaction fee. Successful investments typically range between
$1,000 and $10,000.
3. Peerbackers (www.Peerbackers.com)
Peerbackers distinguishes itself by the fact that it enables businesses to
easily reach out to their online communities and networks. This crowdfunding
site is not limited to funding creative ideas. Anyone with an idea, project,
business or invention can apply to post on the site from anywhere in the world.
Businesses in need of funding create profiles, describe the business and the
purpose of the fundraising, the target financial goal and the length of time to
reach it (should be between 15-90 days). Businesses also upload a photo or
video and information about the rewards they are offering in exchange for the
contributions. Then, businesses campaign for support by reaching out to their
networks on Facebook, Twitter, LinkedIn, etc. and ask everyone to send the
campaign to their networks as well. Funding is released if the project reaches
at least 80% of the funding goal. Fees are: 5% + 1.9-2.9% PayPal fee.
4. IndieGoGo (www.indiegogo.com)
According to the information on the website, www.IndieGoGO.com platform has
helped raise millions of dollars for over 25,000 campaigns, across 177
countries. This site allows to raise capital for any type of venture, including
a for-profit business venture, non-profit cause, or a creative project.
Recipients can easily spread the work through one-click integration with
Facebook, Twitter, and other social media platforms. Each campaign has real
time analytics, including views, referrals, contributions and favorites, which
allows teams to track closely their campaigns. There is definitely a preference
for creative projects (funding for films, music projects), but I have also seen
campaigns by small businesses, food, technology companies and even mobile apps
companies. IndieGoGo releases funds regardless of whether the goal is met, and
some 40% of projects receive at least $500, but only about 10% of projects hit
their targets. IndieGoGo charges a 4% fee on the money raised when the funding
goal is. The fee goes up to 9% if the funding goal is not met. Third party
payment processors charge an additional fee of about 3%.
5. Crowdrise (www.Crowdrise.com)
Crowdrise is a platform used for fundraising for charities (i.e., existing
non-profit organizations with tax-exempt status). Participants are encouraged
to use their social networks to invite others to donate and help spread the
word. Donations are tax deductible. Crowdrise deducts 5% on donations made
through the site as well as a $1 transaction fee for donations under $25 or a
$2.50 transaction fee for donations $25 and over. Crowdrise accepts tips.
Category Two: Investment-Based Crowdfunding
Crowdfunding in this category means using Internet platforms to conduct friends
and family rounds of financing. One example of such platform is Profounder.com.
I have previously written about Profounder, so this is a quick summary.
Profounder is a software platform that facilitates a seed round of capital
raising from investors with whom founders have pre-existing relationships. The
average investment is about $1,500 and an average raise is anywhere between
$35,000-$60,000. The platform is typically used by founders to raise start-up
capital. The model currently in use is revenue sharing. A founder would create
an account with the company description and a term sheet, send the term sheet
to friends and family members and invite them to participate in the offering.
If the goal is not reached within 30 days, the pledges are revoked. There is
also a limit as to the number of investors who can participate in the offering,
as per blue sky laws, that Profounder software helps founders to monitor. Once
the deal is closed, the founder needs to file appropriate forms with the state
and federal securities commissions. Even though the Profounder team provides
the necessary information to do so, it is the founders' responsibility. The
cost is $100 to publish the term sheet, and a $1,000 flat fee to service the
term sheet for the duration of the revenue sharing arrangement.
Category Three: Quirky (www.quirky.com)
This site focuses on developing physical consumer products that would retail
for less than $150 and do not involve integrated software. It works the
following way: investors submit their ideas to Quirky for consideration. If the
idea is selected, it is then published for review and discussion by the
community of "influencers", who can support, revise, vote, make comments, or
come up with branding, etc. for the idea. Following the review process, the
Quirky team manufactures the product and sells it on their site. Quirky pays
30% of revenue by direct sales and 10% of revenue from indirect sales to each
product's influencers and 35% to the inventor.
In summary, there are several categories of crowdfunding each of which is
suitable for a certain type of investment and project. Even though I listed
only several platforms, there are many others out there that I did not get a
chance to explore. In the next blogs, I will discuss the pros and cons of
crowdfunding and what kind of companies and projects are likely to be
successful candidates for crowdfunding financing. I will also discuss the
legislative initiatives that are currently underway to facilitate capital
raising using 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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