The Internet and the expansion of social media sites have expanded the reach of entrepreneurs and opened the doors to a new business financial option known as crowd funding.
Crowd funding is a strategic way for entrepreneurs, artists and nonprofits to raise money for their projects, business or organizations by gaining the support of a “crowd,” or a large group of people, to give them money.
While crowd funding hasn’t gained much popularity in the Milwaukee region yet, some in the Chicago area have used this funding approach.
Paul Trout, owner of Chicago-based Shift Worldwide, said he can see how the crowd funding model could become the future of raising capital for small business ventures and nonprofit organizations.
“As an entrepreneur I started looking for ways to fund my business, and I was really surprised when I started going through the process at how many attorneys were involved,” Trout said. “There are so many regulations implemented by the SEC (Securities Exchange Commission) that it makes it really difficult for entrepreneurs to find investors on their own.”
Crowd funding is an alternative approach. The crowd funding method utilizes a mass of people donating small amounts of cash in exchange for something other than a security in the business or project, Trout said.
“With crowd funding, investors aren’t allowed to promise any sort of return on their investment, the people donating money have no stake in the business or project and choose to support it anyways.”
Slava Rubin is co-founder of the New York and San Francisco based company IndieGoGo. The company website IndieGoGo.com was launched in 2008 as a place for people to share projects, ideas and mobilize fans to support their projects and ideas.
“There are just some incredible trends that are happening in our world right now,” Rubin said. “Social networks are making people more and more connected, and people are getting more comfortable with making transactions on the Internet.”
According to Rubin, hundreds of people have experienced success on IndieGoGo. The projects include books, video games, conferences and events, movie projects and causes, he said.
“You definitely have to be proactive,” Rubin said. “In order to be successful you have to have a great project, you have to be proactive, and you have to have an audience that you can engage.”
Indiegogo.com helps to provide that audience, and in exchange for their support, fans are rewarded with unique VIP perks from the projects themselves, Rubin said.
The most common projects featured on IndieGoGo.com are projects costing $5,000 to $25,000.
“The Obama presidential campaign is the perfect example of what can be accomplished,” Rubin said. “For the last few months of his campaign he was able to raise a $1 million a day all online with over a million sub-$1,000 contributions. It is that whole concept that IndieGoGo wants people to realize.”
IndieGoGo was created in 2008, before Obama’s presidential campaign made the crowd funding idea mainstream. The site is the only international fundraising site and operates in 94 countries across the globe.
According to Ellen Drought, an attorney in the securities practice group of Milwaukee-based Godfrey & Kahn S.C., the SEC does not regulate crowd funding operations as long as securities aren’t being offered. If the investors are aware that there is no return for their money, then the current securities laws probably do not apply, she said.
“It can get pretty technical, and the bottom line is if securities are being offered, the entrepreneur or organizations needs to provide potential investors with a certain level of disclosure and provide them with enough information so they can make an informed investment decision,” Drought said. “This is typically done in connection with a private placement exemption from securities registration.”
The current SEC regulations require the entrepreneur to know who their investor is, and puts guidelines on who can invest by determining how suitable or risk tolerant that person is, Drought said.
“It would be difficult for the entrepreneur to identify who the investor in a crowd funding model is because there are many making a collective decision, and therefore it satisfies this requirement of the securities laws as well,” she said.
In most situations, crowd funding takes a collective crowd of people, all donating smaller sums of money to an organization or to fund a project, Trout said.
The SEC has done a good job adapting the rules and regulations to account for changes in technology and usage of the Internet, Drought said.
As long as a crowd funding model doesn’t offer any type of security for a person’s investment it isn’t likely that the SEC will get involved.
Trout has seen companies offer gift certificates to help fund the construction of a community café, credit listings in the production of a movie and even a video game developer who presold copies of his game.
“It’s not typically multi-million dollar projects,” he said. “Entrepreneurs who need $5,000 or $10,000 to start a venture have utilized the model in other areas quite successfully.”
