Investor Crowdfunding: Leveling the Playing Field for Entrepreneurs
The internet has revolutionized the way that the world does business. Now aspiring entrepreneurs can take advantage of the internet to help their dreams of building a business come true. Raising money has always been one of the most difficult aspects of getting a business off the ground. Now, instead of having to approach venture capital investors, entrepreneurs can harness the power of the internet to use investor crowdfunding to tap investors all over the world for their projects.
There are several different investor crowdfunding websites. The best known is kickstarter.com. With this service, entrepreneurs can post a description of their business project and investors around the world can come to the site and if they like the project, invest in it. Investors can invest as little as $1 for projects they want to see completed. A certain goal is set which represents the minimum capital necessary to get the business off the ground. There are also stretch goals which expand the project as higher funding milestones are reached.
What is interesting with Kickstarter is that these investments are to help the person reach the goal and not for a percentage of the profits. Investors might get a free or discounted product or some other reward for investing, but generally speaking, the entrepreneur gets access to the funds with few strings attached. This is a huge advantage over venture capital investing.
Other crowdfunding sites allow individual investors to receive a share of the profits in exchange for their investment, as with a conventional venture capital share. This type of investor crowdfunding allows people to invest even small amounts of money into venture level investments, something that was rarely possible prior the internet. However, there is a lot of concern that these investments are subject to a lot of fraud by the posters of these projects since these investments are not generally registered with the Securities and Exchange Commission (SEC).
Due to these concerns, there are several regulatory restrictions with share-based investor crowdfunding sites. Generally investors must be accredited investors, meaning they meet certain minimum asset and income requirements along with the expectation of a degree of financial sophistication. With the passage of the JOBS Act in 2012 some of these restrictions should be lifted in the near future. Currently, the SEC must come out with a series of regulatory guidelines before these restrictions are lifted. This is likely to happen in 2013 or 2014, are are likely to cause the crowdfunding industry to really explode.
In 2012 it is estimated that a total of $2.7 billion was raised on crowdfunding sites, despite the aforementioned limitations. Most of this came on donation model sites. It is estimated that $5.1 billion will be raised this year using this business model. Some of the other big crowdfunding sites are Indiegogo, Crowdfunder, RocketHub, Crowdrise, Somolend, and AngelList. If there is a project that you have been dreaming of embarking upon, but getting the required capital has always held you back, considering placing your project on one of these crowdfunding sites and potentially make your dream a reality.