Are you looking to jump on the “crowdfunding” bandwagon? This trendy method of investing in start-up companies gained momentum after federal legislation was enacted last year, but the basic idea has actually been around for centuries. It just has a catchy new name.
As the name implies, crowdfunding is the practice of pooling small investments from a large group of people to fund a start-up company. This runs counter to the usual method used for initial public offerings (IPOs) where shares of stock are initially sold to the public on a securities exchange. Although IPOs have several advantages, the process is often costly and time-consuming, not to mention the hassles associated with meeting disclosure requirements and other technical rules. In contrast, crowdfunding now offers a simpler solution.
Prior to 2012, crowdfund wasn’t as popular because a company had to meet the stringent reporting requirements if the number of shareholders exceeded 500. However, the Jumpstart Our Business Start-ups Act of 2012 (the JOBS Act) increased the limit to 2,000 shareholders. Thanks to the JOBS Act, the age-old premise of crowdfunding has renewed life.Virtually every small business – even those that are unincorporated – may use this technique to raise capital.
Crowdfunding typically takes place over the Internet through “funding portals.” Some of the most popular websites promoting crowdfunding are Kickstarter, CircleUp, and Fundable. Do you due diligence before making any commitments.
Of course, crowdfunding is not without drawbacks. For instance, it could lead to fradulent activity, shares are illiquid so there’s little opportunity for resale, and investors may be kept in the dark about significant events. Whether you’re considering an investment or trying to raise funds for your firm, proceed with caution and consult your business advisor.