Whether you are an artist or an entrepreneur, there has probably been a time when you’ve considered starting a crowdfunding campaign to help fund your next venture. Crowdfunding campaigns have helped start many creative, scientific and political projects but what do you need to know before starting your own crowdfunding initiative?
The Origins of Crowdfunding
Crowdfunding campaigns have been around since the late nineties, helping fund any number of projects through the support of personal donors. Crowdfunding, by nature, thrives off of contributions from regular people who have some interest in seeing the project do well, whether they are friends, family or followers of the project. Donors contribute relatively small amounts of money to the cause with no expectation of gaining a share in the company. It has always been the case that supporters of a project were offered another kind of incentive. These incentives could be in the form of a copy of the CD that a band is making or a signed version of an author’s new book, and most importantly the satisfaction of knowing you helped fund a project you believe in. Popular websites, like kickstarter.com, make it easier than ever before.
How Crowdfunding Could Fill a Gap
In traditional business funding, new businesses seek out contributions from accredited investors. They invest in a company with the expectation of receiving some share in the company’s profit. These investors must meet certain guidelines set forth by the Securities and Exchange Commission (SEC). But attracting big investors like these is a challenge, and small businesses have to maneuver a wide range of legal requirements. To make things even more challenging, allowing non-accredited investors to invest in your business requires a lot of paperwork too, which obviously doesn’t work if you’re looking to get hundreds, or maybe thousands of smaller investments to come up with the same amount of funding as you could raise from just a few accredited investors.
The idea of crowdfunding addresses this problem area by allowing businesses to bypass many legal steps necessary for obtaining these smaller investors. New legislation could make it possible for small businesses to not only accept donations through crowdfunding, but to accept investments in exchange for stock in the company.
Crowdfunding Gains Momentum with The JOBS Act of 2012
To help solve this problem and others faced by small businesses, Congress brought members of the small business and investor community together to create the bipartisan Jumpstart Our Business Startups Act (JOBS Act) in March 2012.
Up until last spring when President Obama signed the JOBS Act, crowdfunded businesses could not receive investments from either kind of investor, accredited or non-accredited. In the new bill there are provisions that would allow virtually anyone to invest in the company and receive more than just a free CD or signed novel, but rather a share in the company.
So why is this good news for you? If you are looking to crowdfund your new business, the law will make it easier for you to raise money and get investors. It provides real incentive to people who might want to invest in your business and it makes the whole process less complicated for you.
The SEC is currently still negotiating the regulations but will hopefully have something set in stone by the end of the year.
Before You Get Started with Crowdfunding
With the passing of the new JOBS bill, crowdfunding is about to get a lot more popular. Putting your ideas online and asking for support can be rewarding, financially and otherwise, but before you put your brilliant idea out there for everyone to see, you’ll want to protect what’s yours.
Namely, your intellectual property. So if you’re working on a new product, for example, the easiest and most effective way to put a claim on your idea is to apply for a provisional patent. This provides you with initial protection, without having to go through the full non-provisional patent filing immediately. With a provisional patent, you get “patent pending” status and one year to decide if you want to file for the full patent, which can be a time consuming and expensive process. Then, if for some reason your crowdfunding campaign doesn’t take off like you were hoping it would, you won’t be stuck with an expensive patent for an idea that no one is going to buy.
With all these changes happening in the world of crowdfunding, it might be a good time to take that leap and start that project or business that you’ve been dreaming of doing. However, until crowdfunding (the investment type) is truly legal, make sure you know the difference between a donation and an investment, and protect your intellectual property before you start that big social media campaign. For more legal help as you start your next project, it’s always smart to speak to a business law attorney.