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1 September 2016
You have a great business idea and know how to implement it to generate income, but you don’t have money to launch your project? Equity crowdfunding could be the answer. Thanks to Title III of the JOBS Act, now early stage companies can raise capital necessary to get off the ground from non-accredited private investors. This new legislation opens plenty of new powerful opportunities for both startups and investors.
Three types of business crowdfunding
Crowdfunding websites could be a great solution for finding new channels of support and raising money from different people. Basically, there are three business investing models that you can choose from: reward-based platforms like Kickstarter and Indiegogo where you can offer contributors some rewards depending on the amount they donate, for example a copy of your creative work, some pre-ordered products, or even a personal tweet thanking your contributor personally.
The second type of business investing is equity crowdfunding enabling private investors to fund startups and small businesses in return for common or preferred equity. Until May 16, 2016, just accredited investors who met certain financial requirements were legally able to invest in startups. The new Title III rules signed by President Obama allow companies to raise up to $1 million every 12 months from any accredited or non-accredited investors regardless of their income or net worth.
Equity crowdfunding enables private investors to fund businesses
in return for common or preferred equity
In addition, there are also crowdlending platforms obliging fundraisers to repay the raised capital (typically, with interest). For example, the Kiva website offers entrepreneurs to receive 0% interest loans to take their business to the next level. The Funding Circle crowdlending website works on a P2P lending model that allows investors to lend money directly to different sized businesses in UK, US, Spain, Germany, and the Netherlands.
How equity crowdfunding works
The general rule is the following: choose a suitable crowdfunding platform, submit an application, undergo background tests, and provide accurate and complete information so that potential investors can make informed decisions. Tell the world about your team, goals, mission, business model – nobody wants to throw their money at you just because you are a nice person wishing to start a business.
Keep in mind that running an equity crowdfunding campaign will cost you much more than opening a rewards project on Kickstarter. You may need assistance with preparing your offering statement and all other financial documents to make sure that they comply with legal requirements. Although the costs may vary depending on the circumstances, be ready to pay around $10,000 in legal and other fees and 3%-5% of the raised capital.
When making an offering on an online crowdfunding platform, don’t forget that you need to disclose all details of your business. Be careful if you have a unique market strategy or business product – its idea can be stolen by other companies. It makes sense to consult an intellectual properties attorney about the opportunity to patent your product. Plus, fundraising campaigns can also attract unwanted attention from rival businesses and increase competition in your niche.
Equity crowdfunding websites
Republic is an off-shoot company of AngelList, one of the largest business crowdfunding services in the Unites States. While AngelList targets accredited investors only, Republic allows all non-accredited investors to support novice founders. Typically, startup businesses placing their offerings on the Republic website need to raise at least $50,0000.
Republic uses an “all or nothing” fundraise model – when contributors invest money, the funds are placed in a special escrow account. The offering should be open for at least 21 days. If the requested amount is collected in full by the deadline, then the money is sent to the startup. Otherwise, the funds are returned to the contributors. The website charges 5% of collected amounts and 2% of securities offered.
Founded in 2009, MicroVentures helps startup businesses raise capital from both accredited and sophisticated non-accredited investors. The platform is principally targeted at early stage companies wishing to raise $150,000 – $1,000,000 and working in such fields as IT, Technology, Software Development, Video Gaming, Media and Entertainment, an others.
The funding application processing time frame is around 6 weeks. You will need to pay $100 for submitting your project and $250 for performing a due diligence analysis. The platform also charges a 10% service fee (5% from investors and 5% from startups) for each successful fundraising campaign. If the requested amount is not collected in full, then all collected money is returned to the investors.
Fundable offers early stage businesses the opportunity to embark reward-based or equity-based fundraising campaigns, but not both at the same time. The rewards programs suit entrepreneurs who want to raise $1,000-$50,000, the equity programs are for companies seeking a larger amount of money – $50,000-$10,000,000.
Fundable charges a $179 monthly service fee for creation and managing your offering regardless of the outcome of the application. The funds collected on the site are not charged with fees, but some transaction fees may apply. The company uses an “all or nothing” crowdfunding model – if the fundraising target has not been met, then all investments are returned to their contributors.
Wefunder is an equity crowdfunding platform built to connect startups founders with accredited and non-accredited investors. The company works with nearly all US-based businesses wishing to raise at least $20,000. Typically, a fundraising campaign lasts 60 days, and during this time all collected money is held in a special escrow account hosted at Boston Private Bank. The startup will receive the funds only if the fundraising goal has been reached.
As for the fees, the company charges $195 to generate all necessary documents and 3% of the total amount raised, but only if the fundraising campaign is successful. Contributors need to pay up to 2% of their investments. Wefunder also offers entrepreneurs to take advantage of their investment contract library, free Form C drafts, and dedicated profile consultant and account manager assistance.
Running an equity crowdfunding campaign will cost you much more than opening a rewards project – be ready to pay around $10,000 in legal and other fees
Obtaining financing is one of the most important dilemmas that a new business has to solve. Online fundraising has become an increasingly common solution because it allows businesses to reach a large number of potential investors and increase the product or service visibility. Consider your crowdfunding campaign as an impressive marketing tool allowing you to get necessary feedback from potential clients. If your project goes unfunded, it means that the public is not interested in your product, so it’s better to reconsider your offering or target market.
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