Is crowdfunding for you?

A new era in funding is here, and it’s making headlines. Potentially providing money for nearly everything from presidential campaigns to technological innovations, crowdfunding presents unique fundraising opportunities for businesses and investors alike.

But before making a decision about whether to pursue crowdfunding, conduct a careful analysis of the three core benefits and their risks.

n Access. You can use crowdfunding portals such as Fundrise, Crowdfunder and GoFundMe to reach new, accredited investors. The Securities and Exchange Commission requires accredited investors to have at least $1 million in net worth, excluding their primary residence, and an annual income of at least $200,000 for a single person or $300,000 for a married couple for at least two years.

The SEC recently approved final rules for Title III of the JOBS Act, which permits companies to raise a maximum aggregate amount of $1 million through crowdfunding in a 12-month period. Effective May 16, 2016, nonaccredited investors can use SEC-registered funding portals to invest in companies. If their annual income or net worth is less than $100,000, then individuals can invest up to the greater of $2,000, or 5 percent of the lesser of their annual income or net worth. If he or she is worth more than $100,000, the investor can use crowdfunding up to 10 percent of his or her annual income, not to exceed an amount sold of $100,000. These transactions must be conducted through a registered crowdfunding broker/dealer.

- Advertisement -

n Liquidity. Many investors may shy away from long-term, illiquid investments. Crowdfunding allows for more wiggle room.

In a traditional market, unloading investments in companies can be difficult because the full value of the investment cannot be identified at the time the investment is made. The rules are less stringent in a crowdfunding portal. Investor ability to trade investments for nondeal-related reasons can mean funding is more sustainable overall than in a more traditional marketplace.

The benefit of liquidity also signals one of its key risks. Individuals who participate in crowdfunding often do not have the same depth of resources as those who take a more traditional route.

n Fractional ownership. Crowdfunding opens the investor pool to almost anyone and allows for more partial owners than other investment models.

One of the most important elements of the JOBS Act is its sanction of crowdfunding portals. The platforms allow for a grassroots approach to investing.

The newness of the crowdfunding portals brings with it high risk. The SEC is taking a wait-and-see approach to its regulations of crowdfunding platforms. If the SEC finds that the platforms are charging investors too many fees or taking advantage of the investors, it could issue additional requirements that significantly affect the crowdfunding marketplace.

If your company is new to crowdfunding, opt for a project where crowdfunding is only a piece of the equity puzzle. As more crowdfunded projects come to fruition, the rules and opportunities for crowdfunding could become more apparent, making this option less of a risky, new approach and more of a staple in the industry. •

Grafton H. “Cap” Willey is a managing director in the Tax Group at CBIZ Tofias, an accounting and tax provider with offices nationwide, including Providence and Boston. He can be reached at CWilley@cbiztofias.com.

No posts to display

1 COMMENT

  1. Great Article Lad…For Entrepreneurs, small and big businesses wanting to generate funding at this momentum from the start is of utmost importance. Major crowdfunding platforms like Kickstarter, GoFundMe, and CrowdRising– encompassing all types of lending and funding opportunities, be it equity investments or even donation-based contributions – have definitely recognized this point. Aside from the platforms integrating greater volumes of investment tools and education materials, I do agree that it is the responsibility of the wider industry to generate more awareness of this route to funding and for Entrepreneurs,and business owners themselves to research the opportunities available to them.
    The levels of networking and communication on the World Wide Web (Internet) between businesses and private equity specialists is very crucial to take action – this will help small businesses create a pipeline of investors who are prepared to back their cause once they appear on a crowdfunding platform like CrowdRising (http://www.crowdrising.net/ref/silentmoney) . But Importantly doing as much promotion and networking around the business as possible could also prove beneficial results for the Entrepreneur, and business owner.