I just attended a presentation reviewing the basics of crowd funding and decided to write about it since I am asked frequently as to what I know.
Crowd funding (aka peer-to-peer fund-raising) is a way for individuals to raise money from other individuals via on-line web portals established as fund-raising vehicles. It started mainly as a way to solicit small donations for charitable causes and for creative projects such as CD music recording, low-budget movie and book publishing. It has mushroomed in recent years and is now used for a variety of purposes, including raising money to fund product development and business start-ups. However, legal issues limit solicitations on most portals to requesting donations. A few portals do facilitate loans, and have structured themselves to comply with federal and state lending laws. Selling company stock is prohibited unless the site is specifically geared toward accredited investors as defined by the SEC.
Crowd funding web portals permit individuals to:
* Post information about a charitable cause, project, or business venture
* Specify how much money they are seeking and how it will be used
* Obtain consumer feedback, and donations or loans
The web portals collect and disburse funds, and charge a fee typically of about 5% of the money raised. Some portals forward all funds raised; others do not forward funds unless the requestor’s minimum funding goal is met. Individuals soliciting donations commonly offer contributors a reward or benefit (e.g. free copy of CD recording), but such an offer is not required.
There are reportedly more than 100 crowd funding portals in the U.S. and many others overseas. The most well established U.S. sites are Kickstarter (www.kickstarter.com) and Indiegogo (www.indiegogo.com).
Chicago designer Scott Wilson made history as one of the biggest successes to ever hit Kickstarter in 2010. His creation the TikTok and LunaTik wristbands, which converted the Apple iPod Nano into a watch, attracted 13,500 backers, and almost a cool million in funding. He’d originally asked for just $15,000. With his initial success, TikTok and LunaTik are now sold by major retailers, including Amazon, Walmart and yes, even Apple.
Another success was Ministry of Supply. In this project, four athletes from MIT came together to create business wear with more performance, borrowing technology from NASA. They launched on Kickstarter to great success, raising almost $430,000 from 2.798 backers eager to wear a performance piece of space apparel.
The U.S. JOBS Act of 2012 expanded the potential for crowd funding by authorizing small businesses to sell common stock up to a total of $1 million in any 12 month period to non-accredited investors under SEC rules slated for publication in 2013. Until these rules are published, crowd funding sites are restricted as noted above.
More information can be obtained from The National Crowd Funding Association (www.nlcfa.org).