Many are familiar with crowdfunding in the context of the fore-mentioned example, but many start-ups and small businesses are now taking advantage of this innovative method of financing as well. With recent regulatory easing
So you generously contributed $25 through GoFundMe to “Little Johnny’s Skinned Knee Rehab Fund”. No big deal, just doing what you can to help out, right? We hear ya! And we applaud your altruism!
Many are familiar with crowdfunding in the context of the fore-mentioned example, but many start-ups and small businesses are now taking advantage of this innovative method of financing as well. With recent regulatory easing, and a growing number of online platforms facilitating these arrangements, access to capital is increasingly becoming available to small businesses. But is crowdfunding right for your business? That depends.
Here’s what you need to know.
What is Crowdfunding?
Simply put, it is a method by which individuals and companies raise capital from a large amount of small investors. There are many different versions and applications of crowdfunding but they generally all fall under the following three categories:
- Equity Crowdfunding
Similar to an IPO, the company exchanges equity for capital. Under the SEC Title III Regulation Crowdfunding rules first outlined in the JOBS Act of 2012, a company can raise up to $1.07 million in a 12-month period and remain exempt from a majority of the SEC registration requirements of the Securities Act of 1933. In short, they can avoid a huge headache normally associated with equity offerings. Please note, while exempt from the lion’s share of SEC registration requirements, some companies will still need to obtain audited financial statements.
- Traditional Crowdfunding
No equity is offered in exchange for capital but companies will often offer a small item of value i.e. decorative glass, T-shirt etc. Companies should proceed with caution as this type of arrangement may inadvertently create an income and sales tax liability. Funds received in excess of services rendered or items provided are viewed as taxable income in the eyes of the IRS and sales tax may need to be collected if the item exchanged would normally be subject to sales tax when sold.
- Debt Crowdfunding
Investors offer capital in exchange for a debt instrument of the company. These funds are essentially loans from investor to business under the assumption that the money loaned will be paid back with interest. Peer-to-peer lending platforms are the most familiar application of this type of crowdfunding.
Should My Business Use Crowdfunding?
That depends. Here are a few questions to consider:
- What are the goals of the business?
- What stage of life is the business in?
- What are the potential consequences?
- What are my alternatives?
There are countless other variables and factors to consider in deciding whether crowdfunding is right for your business. Recognizing that no two businesses are the same, we pride ourselves in understanding the nuances within each client’s business in order to provide customized recommendations and solutions.
If you need “big-picture” help in laying out what crowdfunding might look like for your business, or have questions on some of the details of crowdfunding, don’t hesitate to call us at 203-489-0612 or contact us online.