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Flavors of Crowdfunding, The Crowdfunding Frameworks

posted May 22, 2013, 1:57 PM by   [ updated Jun 7, 2013, 9:57 AM ]
    Crowdfunding is a relatively new and rapidly evolving phenomenon. Whenever I tell people I run a crowdfunding consulting companyI'm bombarded with questions. How does it work? Is it legal? What’s the JOBS Act? Today’s blog is an attempt to cover a few of the basics.

    First, a stipulation. I’m going to focus on the U.S., where I live. Here, it’s simplest to think of crowdfunding as one of two basic types: donation-based crowdfunding and equity-based crowdfunding.

    Donation-based crowdfunding gets most of the attention. Think Kickstarter, one of the leading CF sites. There campaigners solicit donations for their developing projects in exchange for gifts—often a sample of the product or service. Donation-based CF is a great tool for early stage innovators, providing much needed capital, market feedback, and a network of early adopters.

    Common Kickstarter campaigns feature music and film projects, as well as other artistic endeavors. But Kickstarter has also been pushed by users into product campaigns—with some watches, phone accessories, and video games scoring great successes. Equity-based crowdfunding where small businesses raise money to grow their organizations, is more complicated. Here the “campaigner” gives away ownership in his/her business in exchange for investment.

    Historically the purview of friends, family, and angel investors, this type of CF is legally more complicated. In the U.S., the rules of financing are governed by the SEC. Currently, crowdfunding portals raising money for companies are restricted to wealthy investors. Regular folks simply aren't allowed in—at least not yet. It’s ironic that Americans are free to buy limitless lottery tickets, but not to invest in a startup or small local business. 

    Change may be coming. In 2012 the JOBS Act passed, promising to free up restrictions on equity-based CF. But currently it’s mired in the rules-making part of the SEC bureaucracy. Now everyone is waiting to see the exact terms that will govern this potentially important new law. 

My take: Never bet against the market. Regardless of the SEC and legislation, looking for crowdfunding to become an increasingly important tool to drive innovation in our economy.