You need a lot of things to launch your small business, not the least of which is capital. Back in the day (before 2012), publicly soliciting investors for your small business would involve adhering to complex and often burdensome federal securities regulations. But the rise of “crowdfunding” and “peer-to-peer lending” as a means of providing entrepreneurs with access to capital led to the enactment of the 2012 JOBS (Jumpstart Our Business Startups) Act which lifted the long-standing ban on the “general solicitation” of accredited investors.
If you are seeking investors for your small business, or our looking for funding sources other than a traditional business loan, understanding what crowdfunding is important as it may be an attractive alternative to get you the resources you need to start and grow your business.
What is Crowdfunding?
Crowdfunding is the term for soliciting and assembling funds from a large group of people who don’t necessarily know the business owner. This is typically done through a third-party crowdfunding organization or online platform. There are literally hundreds of such sites on the Internet, with some of the most well-known being Kickstarter, Kiva, AngelList, and CircleUp.
There are three types of crowdfunding that can be used to get the money you need for your business:
- Reward-based crowdfunding. In this mode of crowdfunding, investors aren’t given or expecting equity in your company, but rather something tangible. That could be a product, service, or other kind of token of your appreciation for their investment. For example, if you are launching a coffee-roasting business, you could provide an investor with a pound of coffee; if you are starting a hair salon, you could offer an investor a free haircut. Sometimes, if your business idea is particularly inspiring to investors (say, you’ve developed a product that would reduce pollution or add some other public good), all they may need is a nice thank you note.
- Equity-based crowdfunding. Investors involved in equity-based crowdfunding will in fact expect and receive shares in your company based on the amount of their contribution. While you won’t be making any loan payments, be aware that the crowdfunding sites used to facilitate the investments will charge a percentage of the amount funded for their services.
- Peer-to-Peer Lending. This type of fundraising involves multiple parties pooling funds to provide your company with a loan which needs to be paid back with interest. Rates will depend on the credit history of the person applying for the loan, but those with good credit can often get a better interest rate on a peer-to-peer loan than on a traditional bank loan.
Whether crowdfunding is the right move for your small business depends on a number of factors, and you should always consult with an attorney before engaging in any activities that involve soliciting funds for your small business.
Yee Law Group, PC, L.L.P.: Sacramento/Roseville Business Attorneys
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This article has been prepared by Yee Law Group, PC, PC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.