Have you considered crowdfunding for your small business but thought it was too complicated or too risky? Did you think it was just an option for one-off projects instead of long-term business sustainability? As crowdfunding gains popularity, more options are becoming available for small- and medium-size businesses.
Crowdfunding is growing beyond rewarding perks to friends and strangers who donate to your efforts. Now, thanks to a new law, regular-Joe investors can get a piece of your company’s equity pie.
What the JOBS Act means for crowdfunding
Title III of the Jumpstart Our Business Start-Ups (JOBS) Act and Regulation A+ (RegA+) go into effect in May. Through these changes, the SEC will allow crowdfunding platforms to register as official equity “funding portals” through which small businesses can raise up to one million dollars per year.
RegA+ is perhaps the more exciting component: It allows non-accredited investors to use equity crowdfunding platforms to contribute to entrepreneurs. These non-accredited investors must have a net worth of less than $1 million or a yearly income below $200,000 in order to invest in exchange for equity.
Don’t expect IndieGogo or Kickstarter to immediately offer equity investing. These platforms are tightly focused on contributions made in goodwill -- for the love of the work or the project -- with expectations of modest rewards rather than financial returns. In most cases, crowdfunding campaigns up until this point have had a tangible goal, like the development of a single project, build-out of a retail space or completion of a work of art. If those platforms are going to pick up on the equity game, it will take time to refine and solidify their policies.
So, what are the options for a small business owner considering crowdfunding?
Perks are still popular
Kickstarter, GoFundMe, Indiegogo and Crowdrise are still the go-to platforms for rewards-based crowdfunding. Each platform takes a different commission from your campaign’s earnings, so be sure to read the fine print before signing up and setting a goal.
You’ll also want to consider whether a platform offers fixed goals (like a Kickstarter campaign where funds are returned to contributors if the goal isn’t met) or flexible goals (where all contributions go toward a project, no matter what.) Indiegogo, for example, allows you to choose a flexible funding campaign or fixed funding.
Local love for microloans
For entrepreneurs with modest financing needs and good credit, microloans can be a low-risk answer. Programs like Kiva Zip allow supporters near and far to contribute small, no-interest loans toward a business’s needs.
If you live and operate your company in Arkansas, California, Kentucky, Louisiana, Michigan, New Jersey, Pennsylvania, Virginia or Washington, D.C., you may be able to participate in a Kiva City program that administers small business loans through local business development organizations.
Time to think about equity
Have a big funding ask? If you’re thinking about equity crowdfunding, keep an eye out for firms filing with the SEC to serve as funding portals. Many of these portals are well established, with extensive experience working with accredited investors to assist companies with fundraising rounds.
As equity crowdfunding becomes more accessible, it becomes even more important to do your homework before choosing a crowdfunding option for your business. You owe it to yourself and your company to research each crowdfunding portal you discover. Don’t get distracted by flashy pitches or big promises. Until business owners get a firm grasp on equity crowdfunding, we’re bound to see plenty of “trial and error” case studies to learn from.
Not sure which financing path is best for your business? Meet with a SCORE mentor to review your options.