Funding your business online using crowdfunding
Crowdfunding refers to raising funds from people online. There are four types of crowdfunding: loans, "deals", donations, and equity. The first three are not regulated. Loan crowdfunding involves borrowing from people online. No ownership is involved. "Deals" involves providing an incentives for someone to give a small amount of money, for something that you will give them later on. No ownership is involved. Donations involve having people give you money because they believe in your cause or in you. Equity crowdfunding involves selling a share of your business to someone.
Of the four options, only equity crowdfunding is regulated. Because of that, people who raise equity funds using crowdfunding must follow the rules.
- If you want to RECEIVE crowdfunding EQUITY money, you will have to go through approved crowdfunding websites, where you will have to disclose a lot of personal and business financial information.
- You are limited to raising $1 million per year through equity crowdfunding. You can raise more than $1 million, but you need to sell to accredited investors, or "angel" investors. These are people who have more than $1 million in personal equity. You can raise up to $50 million through angel investors. After that, you need to "go public" and follow the rules of the US Securities and Exchange.
- If your raise more than $500,000, your books and records must be audited.
- You will have to completely separate your personal and business finances. Legally, this means you must be a corporation or LLC.
- If you do not raise the entire amount (according to your posted plan), you do not get any funds. The crowdfunding portal holds funds until the entire amount is raised.
- Raising funds through crowdfunding involves creating a campaign, with videos, a basic business plan, and financial information.
- You will have to continually provide information to your investors.
- State laws will have to catch up with federal laws - so it is important to work with an attorney.
- Equity means you are sharing a percentage of your business forever. It means risk on the investor's part - that they will never get a dime back. It means business owners have given up partial ownership and hopefully, for you and your investors, you will return significantly MORE money to your investors than you ever received from them. If you don't want this, then you don't want EQUITY funding - you want DEBT - where you only pay back the loan plus interest.
Here are links for more information about crowdfunding
Overview of crowdfunding from SCORE
Knowledge Center for Crowdfunding
Crowdfunding Bible - details to doing a crowdfunding campaign
Five Steps to Practice Safe Crowdfunding