Crowdfunding, sometimes also referred to as “how to get strangers to pay for your stuff,” is a relatively new concept. If you’re not familiar with it, popular crowd funding sites like Kickstarter or Indiegogo can help people to fund projects that they wouldn’t be able to get a traditional loan for. Crowdfunding can raise money for just about anything. Some ideas that have successfully obtained funding from crowdfunding are independent movies or music projects, paying medical bills, and launching new products.
So is crowdfunding something that can be used to help get your small business off of the ground financially, or to get an influx of cash for a new idea? The answer is sort of. There is currently a proposal with the SEC that will allow private companies to solicit up to $1 million per year from unaccredited investors. This proposed crowdfunding plan will be available to the public to review for 90 days; the time frame started in October.
Currently, crowdfunding is most often used for personal projects, like products or independent films. Some sites are now offering the ability to crowdfund for personal expenses as well, ranging anywhere from funds to buy a new car to paying college tuition and beyond.
The new legislation that is proposed has a lot of interesting points for small businesses. It would allow small businesses to raise a million dollars each year from investors that would not count towards their ownership limits, as small businesses have a 2,000 member cap before they are required to register with the SEC. Also, instead of having to have a concrete fundraising number, businesses would be allowed to set a range in which they hope to fundraise.
Of course, there will be tax implications and if a company is to raise more than $500,000 in a year, they will need to come up with audited statements of their finances. This could potentially discourage companies from using crowdfunding to raise money.
While not all small businesses can yet take advantage of crowdfunding, there are still some ways that startups can use this method to their advantage. If you’re starting a new business that is based around a specific product or service, you should have no problem using one of the crowdfunding sites to raise money for one specific thing. You can also use crowdfunding to help identify who will purchase your product or frequent your business. Just make sure that you read the terms on any crowdfunding site before using it for business purposes.