If you haven’t heard of websites such as Kickstarter, Crowdfunder, Indiegogo, or RocketHub, chances are that you soon will. These are the websites that are leading the charge in the new phenomenon of “crowdfunding. If you are starting a business and looking for investors, it may be worth your time to consider the use of crowdfunding for all or part of your investment strategy. To help, here is a LegalEeze crash course:
What is Crowdfunding?
With crowdfunding, people with an idea, but no funding, ask an online community to contribute to their project. The donors/investors typically receive some type of compensation based on their contribution level. Commonly, there are several tiers of donor/investor rewards, with larger rewards reserved for those that contribute more or donate first.
What Can I Crowdfund?
In its early stages, crowdfunded projects tend to be artistic in nature. So far, artists, filmmakers, musicians, and designers have been among the professions most likely to utilize crowdfunding as they tend to be more creative and more open-minded. Donors and contributors may receive tickets for a show, a meeting with the cast members, or even a role in the production based on their contribution level.
The reality, however, is that with enough creativity, crowdfunding can be used in almost any industry. Any business could give away a t-shirt right?
What are the Benefits?
There are several important reasons to consider crowdfunding a project. The most obvious is to draw attention to your project. Crowdfunding allows anyone, anywhere to donate.
Another benefit is that most crowdfunding sites will have an “all or nothing” model. The contribution/donation period for the project is usually fixed, and projects that do not meet their funding goals return funds to contributors. This helps the creator know with certainty whether the project will go forward, and also lets donors/investors rest easy they will get their money back if the project does not meet the funding goals.
Plus, crowdfunding can be an excellent way to “test the waters” before doing a full product launch. Because these sites track the number of contributions as well as the total pledge amount, project creators can use crowdfunding as a type of informal market research.
Things to Be Aware Of
Crowdfunding is not free. Project creators lose a tiny bit of the proceeds on each transaction. Sites vary with the amount they charge, which generally fall into the 4-5% range. Therefore, if you can raise funds directly, such as starting your own charity website or soliciting by direct mail, you will receive a greater amount of total funding.
The best piece of legal advice that we can give you is to consider incorporating prior to starting your crowdfunding project (especially if you are making a product). Creating an LLC or other business entity may help shield project creators from future product or business liability.
From a practical standpoint, creators should make sure they can deliver when they promise a physical product. Make sure your supply chain, distribution, and other day to day operations are capable of scaling up if demand is larger than anticipated.
Crowdfunding is a high tech way to finance your project, and can be extremely beneficial if done properly. While crowdfunding is not for everyone, it can be one tool for getting your project of the ground while simultaneously raising awareness. Be sure, however, to carefully read and agree to the terms of service and abide by all applicable state and federal law when undertaking a crowdfunded project.
– Norris Legal, L.L.C.
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