In the summer of 2012, I was listening to a webinar on crowdfunding presented by then 85 Broads, now Ellevate.com. The presenter, Candace Klein, was one of the driving forces behind the Jumpstart our Business Startups (JOBS) Act passed in April of the same year. Of course, my first concern was for the impact on intellectual property when disclosing a full business plan and product information online.
Shortly after that webinar, I joined the two equity based national crowdfunding groups, CfPA and CfIRA, and Traklight partnered with Indiegogo.com. Our mission was to help companies identify and protect IP before crowdfunding as discussed in last week’s blog post.
Charitable Donations → Rewards → Equity
It’s important to remember that the origins of rewards-based crowdfunding are in the charitable donation space. Several sites, like gofundme.com, are essentially donation or cause platforms. You pay online toward a campaign but you do not receive any tax receipt; rather, you feel good for donating to a cause. The recent panel at the Licensing and Executive Society Montral chapter meeting featured crowdfunders from every category listed above.
Heri Rakotomalala of SeedingFactory has raised funds using donations to preserve Montreal buildings and is working on a new platform, again cause based, called MakeaChamp. Athletes are funded by donations to MakeaChamp.
Rewards-based — think Indiegogo, Kickstarter, or Rockethub
Rewards crowdfunding means that you are not simply donating but rather buying a reward, which in some cases is the product but can range from social media mentions to t-shirts and other merchandise.
Panelist Stephane Rainville discussed his use of Kickstarter for a couple of campaigns. His lesson learned including shortening his second campaign as he raised 50% in the first three days and then the rest in the last week.
Demystify JOBS Act “Equity” Crowdfunding
There is still confusion around equity crowdfunding Let’s breakdown the JOBS Act into the various titles and what is operational or “legal” as at June 19th, 2015.
The investing world is divided into the accredited and non-accredited investor. Accredited is defined by net worth or income level and the idea is that individuals making a certain amount of money or who have accumulated a threshold level of wealth are somehow better prepared to invest in private companies than those unaccredited. Equity crowdfunding would open up investing to all individuals while calculating the total annual investment by income level.
Title II – Public Solicitation of Accredited Investors
Panelist Gil Michel-Garcia publicly announced his fundraising efforts for his company Wafu, Inc and used the platform CircleUp.com to raise money from accredited investors. The ability to widely advertise a raise improved his reach and allowed Wafu to reach more potential investors.
Title III – Equity Crowdfunding
This would allow unaccredited investors to buy stock or debt in private companies through funding portals or platforms. The model is similar to existing platforms like MicroVentures.com or EquityNet.com but non-accredited investors will be able to access deals. Title III is in limbo because the SEC collected comments in early 2014 but have yet to release the rules. Therefore federal equity crowdfunding is not yet legal.
Title IV – Reg A+
Effective June 19th companies can “go public” and raise up to $50 million but with some stringent filing and audit requirements. This is not at all for startups and is NOT a replacement for Title III.
State Equity Crowdfunding as an Alternative to Title III
Approximately twenty states have intrastate or “within a state” equity crowdfunding that allows non-accredited investors that reside in that state to invest in companies operating within the state. Another almost twenty states are in the process of creating similar legislation. More information is available here (thank you to Anthony Zeoli).
We continue to advocate for the release of rules around Title III for companies to use federal equity crowdfunding to raise up to a million dollars and not have to worry about state residency requirements.
The bottom line is that no one approach or platform is best – it’s about finding your crowd – those who will support your campaign.
A final note on doing your homework about the financial side of your campaign and evaluating the terms on the site. For example Kickstarter is all or nothing. If you do not hit your target, you will not receive any funds. Indiegogo has the same approach but also offers an alternative where you can keep what you raise but pay a higher commission. Decide what your goal is and how much money do you need to fulfill your rewards before you pick that platform.
Remember that a crowdfunding campaign is excellent market research and a success is product validation for investors. Next time we will talk about what it takes to build the social capital necessary to succeed.