The concept of crowdfunding goes beyond companies like Kickstarter. It’s something both people and businesses have done to generate funds since long before the internet’s creation. It became more organized in the data age. Over the years it has broken into different categories. Before you can start crowdfunding for your business, you need to understand the difference between traditional and regulation crowdfunding.
Traditional Crowdfunding
Standard crowdfunding is based on one of two concepts. It could focus on donations, like GoFundMe, or mixes contributions with a reward model, such as Patreon. In both cases, there’s no promise of company shares or a portion of ownership.
Regulation Crowdfunding
Where the traditional method of crowdfunding is more open, regulation crowdfunding is based on a set of conditions. This practice allows the buying and selling regulation CF shares by eligible companies. These shares are in the form of securities protected by the SEC (Securities and Exchange Commission).
Regulation Crowdfunding Conditions
Unlike standard crowdfunding platforms, there are several conditions attached to the regulation form of the practice. First, all transactions must take place on an SEC-registered broker-dealer or funding portal. Second, the company is only permitted to raise a maximum aggregate amount of $5 million over 12 months.
During this period, the company must limit the number of non-accredited investors that purchase stock. Furthermore, the securities cannot be sold for one year after their crowdfunding purchase. Finally, all records must be filed with the SEC and funding portal for review.
What Works Better for Your Business?
The type of crowdfunding that works for your business depends on your intentions. For example, say you’re an artist or writer developing a text-based or graphic novel. This would probably be considered a project instead of a business. Thus, you would rely on fans of your work to invest through traditional crowdfunding.
Regulation crowdfunding works when you are a startup that requires a large amount of capital to make necessary infrastructure and product investments. Not only could you elicit the interest of accredited angel investors and funds. You also have the power to accept funds from a certain number of unaccredited individuals that admire what you’re doing.
Overall, it’s your business plan that moves you toward either traditional or regulation crowdfunding. If your estimated operating costs are only in the hundreds or thousands of dollars, then it might be best to go with the traditional method of donations and individual rewards. Conversely, should you require operating funds in the six and seven-digit range, then research the requirements for regulation crowdfunding.
