What is Crowd Funding and Should I Use It?

Situation:

Crowdfunding is the collective effort of individuals who network and pool their money to support efforts initiated by other people or organizations. This is seen all the time when we have a natural disaster and people are asked to donate money to their relief effort. Crowdfunding can also be used as a financial tool for the funding of businesses by a pool of small investors. Crowdfunding was specifically mentioned and approved by the Jumpstart Our Business Startups Act (JOBS Act), a law intended to encourage personal funding for small businesses. The key was the easing of federal securities restrictions on who qualifies to contribute or fund this type of investment. It was signed into law by President Barack Obama on April 5, 2012.

Analysis:

  • As of 2012 there were over 450 crowdfunding platforms in the USA.
  • Implementation of the Crowdfunding platforms has not been finalized by federal securities regulators as of this writing.
  • States also have securities regulations that need to be addressed before full implementation of any crowdfunding platform within that state.
  • Under the Securities Act of 1933, a company that offers or sells securities must register the securities with the Security and Exchange Commission (SEC). The JOBS Act seeks to ease this restriction.
  • Currently, a person must be an accredited investor in order to donate personal capital to a crowdfunding platform. An accredited investor is defined by the SEC as ‘having over $200,000 in annual income ($300,000 for a married couple) or have over $1,000,000 in assets not including the primary residence’. See SEC Rule 501 of Regulation D.


There is a lot of confusion over crowdfunding platforms and their use by business owners. As always, business owners need to be aware of the consequences of using any new technology or service, and crowdfunding is no exception. Consider the reputation of the company being considered and ensure that the intellectual property of your business will be protected by the crowdfunding platform. Always consult your business advisor, board of directors, and your attorney before you use any loan mechanism for your business. There is no black and white recommendation to be made here. Caveat emptor!
If you find yourself in the position of investing through crowdfunding, or wondering if this is a way to grab investors for your business, we can help answer you questions. Contact ASBC today!

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