Crowdfunding Simplified

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With so much talk of Crowdfunding lately, it’s important to fully explain what it is and how it works. There’s a lot of speculation and guessing out there, when in fact it’s a very simple and straightforward concept and process from start to finish. It involves raising money through a number of investors or donors, depending upon the type of crowdfunding. The process is completed through Crowdfunding platforms, where an individual entrepreneur can create a profile that describes the project in great detail. The best way to describe this is that it’s basically the same concept as asking your friends and family for funding, but here you’re asking the world. Through the Crowdfunding platform you are able to attract potential funding, but the power of social media is really where this will gain legs and begin to take off! It’s a way to bring awareness to the project/business while it’s in the early stages of development. There are four different models of Crowdfunding: donation, rewards, pre-purchase, and equity.

The donation model is the most common. Contributors make a donation to support the project simply because they believe in it. They do not receive anything in return other than a “thanks” but they fully understand this and just want to show that they fully support the project. There is no expectation of a return, and there is no contract.

The rewards model is one of the most attractive and popular models of Crowdfunding portals. The reward can be something intangible, such as a mention or listing as a supporter in print media, or it can be a tangible reward. For example, if the company produces custom hats, they might offer each donor a custom hat with their name on it, stating that they were a donor. Another example could be a film seeking production dollars that is offering people that donate at a certain level tickets to the premier screening, and those that contribute at a specific level may even have the opportunity to have a role in the movie. These more appealing and highly desired rewards are often limited to just one or two and they carry a premium. Just like the donation model, there is no stock in the company so there isn’t a securities issue.

Then we have the debt or lending model where the investor is essentially lending money to the company with an expectation of financial return on that investment. There is no ownership of the business given with this model and the SEC will be providing oversight of this type of crowdfunding.

Equity crowdfunding is unlike the other models as they do not give investors actual shares of the company. Both debt and equity  crowdfunding fall under SEC regulation. At the present time, the SEC has not set the rules and regulations of equity Crowdfunding, so platforms like SterlingFunder.com are waiting for clearance in order to do business with unaccredited investors.. With this type of crowdfunding, the investors get shares  of the company that they are helping to fund and also provide advice to the issuer. There is always the risk that a business will not execute its plan and leave an investor without a reward, or the satisfaction of seeing it materialize. A wise investor – even one who is donating with no expectation – will do as thorough an examination as possible.

If you are creating a project or company, you will to make your project look and appealing to engage your target audience of investors.  This applies no matter what type of crowdfunding you do. Your investors will expect to see a solid business plan, but you won’t  get that far unless you hook them right away. While someone looking for an investment is going to be more concerned with sales numbers, profit projections and their overall return on investment, someone who is donating for a reward is more inclined to judge a project on its “wow” or “cool” factor. If they like the concept, then they will probably donate. They aren’t looking for a return on their investment, they are looking for an interesting and innovative project to give their money towards.

So, why is Crowdfunding so appealing to some people? For many people, It allows them a chance to become involved in something on the ground floor. If the project becomes successful, they can say “I was part of that!” That’s a huge appeal to this style of funding. There are entrepreneurs who have a deep interest in fostering startups and nurturing a young business. That feeling of accomplishment is the goal of all who invest their money in crowdfunded projects.

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