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Financing Your Business: What is Crowdfunding?

By Tanya Roth, Esq. | Last updated on

A hot topic for entrepreneurs these days is "crowdfunding." It's a way to raise money for small businesses that don't have the means to be funded through angel investors or venture capitalists.

For many small business folk, "crowdfunding" is an entirely new word. 

So what is crowdfunding?

Have you heard of microlending? It's something that has been in the philanthropy world for a while now. The concept is simply that a little can go a long way. Numerous people donate small amounts. The funds are pooled together and given to a charity as a larger amount.

The same concept applies in the for-profit world. Numerous "investors" come together and invest small amounts. That money gets pooled together and is given as a larger investment to a small business.

Crowdfunding typically happens over the Internet. There are numerous crowdfunding websites that allow investors to give funds and allow the small business owners to seek funds. Some of these sites include 33Needs, Kickstarter, and IndieGoGo.

Some of these crowdfunding websites will allow investors to take a cut of the equity in your venture. Others may simply allow people to donate to your cause.

The problem with crowdfunding has historically been the fact of regulation. Investors outside of family and friends need to be accredited. In a nutshell, the Securities and Exchange Commission imposes registration requirements and disclosure requirements on the companies seeking investment from the general public. It also places income and net worth restrictions on who can be an accredited investor.

The new JOBS Act, signed into legislation by President Obama last week, relieves some of these burdens, as we'll discuss in a future post.

For many small businesses, crowdfunding is a great way to raise money. It's not the only way to raise money, however. If you're a small business looking to raise some capital, it's wise to do your research.

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