Crowdfunding involves securing start up or growth money from a large pool of investors rather than attempting to find just one venture capitalist or traditional lender to fund the business. This is a great way for good ideas that may get overlooked by the big players to get a fair shot at being funded. This also gives investors a platform to get the first shot at investing in some of the most innovative ideas and concepts without having to take the majority of the risk. When a group of investors all go in together, it greatly reduces the risk and exposure each investor will have in the deal.
The Internet provides the platform for Crowdfunding, as it allows potential investors to find deals much easier. There are many portals, but overall they all operate basically the same. Here’s a general breakdown of how the process works.
- The startup or business will create a profile on the website and will use their company details to establish the profile. They will then complete the questionnaire and also include as much detailed information as possible. This is a very important step in attracting the funding that they need, so it is important that extra attention and detail are put into the presentation part of the profile. The goal is to put as much detailed information into this in order to attract investors. An issuer must be as transparent and detailed as possible because this first look is the best chance to make a connection.
- Most Crowdfunding sites will not charge a fee to establish a project or profile, but instead they will collect a percentage of the funded amount. The SEC still needs to put forth their regulations and rules, but it is widely believed that this will be about 5%. Every site will have different terms and conditions and we strongly suggest that these are fully read and understood before creating a profile.
- The total amount requested is up to the issuer (with a maximum of $1 million for equity portals). Portals like SterlingFunder will be looking for good businesses opportunities for the investors. If their portal gets a reputation of allowing bad deals, investors will look elsewhere for opportunities. Maintaining high standards will be important.
- Each project has a target funding goal, and the funds received are not dispersed unless that goal amount is reached. When placing the deal on the website it is important to ask for a realistic number, but a number that will ensure the end goals are met without delay.
- Make sure you, as an issuer, clearly indicate what you are offering to the investors. In the reward crowdfunding model, issuers generally offer a product or service that they are creating, while equity crowdfunding issuers will be giving an interest, or share, in the company. All of this should be spelled in a detailed and clear manner.
Spend Time Researching: With so many different portals to choose from, make sure to spend some time to investment management research and make a good decision. First, you’ll need to determine if you want to use a reward, equity or debt type of crowdfunding. Then check the portals that do that and look at all the information provided. At this time, equity crowdfunding is not an option for unaccredited investors, but many portals have already launched in anticipation of SEC rules and regulation and are providing news about crowdfunding and good education about creating your campaign. SterlingFunder is pleased to be among those who will be ready to launch projects as soon as the SEC says “go”!