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What is Crowdfunding?

Crowdfunding is the newest source of funding for startups and/or small businesses. For several years, companies such as KickStarter, Indiegogo, and RocketHub have offered organizations, individuals or businesses web-based platforms on which to raise money via donations for fees ranging from 5-12% including Paypal processing fees. A lower cost international platform, Kapipal, does not charge a fee (except for the Paypal) for campaigns.

Most donation based crowdfunding projects are geared towards raising money for non-profits and community projects. Incentives like tee-shirts, movie credits and/or karma are usually offered to encourage donations.

Entrepreneurs are increasingly turning to donation crowdfunding for presales of products. Several companies have raised millions of dollars for the promise of a product. Examples include the Pebble Watch and Double Fine Adventure.

Prior to 2013, it was illegal for a startup to offer equity on these web-based sites. That changed when the final rules for Title II of The JOBS Act were released on September 23, 2013 lifting the ban on general solicitation. This new legislation makes it legal for companies to begin advertising their private placements and accept investment from accredited investors. Entrepreneurs will be required to validate the accredited status of each investor and entrepreneurs considered to be “bad actors”–meaning they have been criminally prosecuted by the SEC–are not allowed to conduct a Title II offering.  Also, entrepreneurs will be required to file Form D 15 days after the sale of their securities if they generally advertise their offering. Entrepreneurs can conduct a Title II campaign on their own, through an attorney or on an online platform such as AngelList, EquityNet, and FundersClub. We recommend that entrepreneurs seek the advice of an attorney or accountant before implementing a Title II crowdfunding offering in order to comply with the securities laws. Doug Ellenoff, a New York based securities attorney and a highly sought-after speaker on the subject, is probably the most knowledgeable attorney about the use of crowdfunding and The JOBS Act legislation.

The laws enabling entrepreneurs to raise money among unaccredited investors—known as Title III of The JOBS Act– were published on October 23, 2013. During the public comment period which has now concluded, many concerns were raised about the proposed regulations particularly with respect to cost. CareerFuel CEO AnnMarie McIlwain was among the first to flag these issues and prior to the release of the draft regulations, she coauthored an opinion piece that was published on TheHill.com with recommendations for the SEC. The SEC is expected to enact these new laws during 2014. It remains to be seen whether the regulations will be modified enough to make the use of Title III a practical option for entrepreneurs.

Education for entrepreneurs considering crowdfunding is available here on CareerFuel and with the purchase of Crowdfunding for Dummies, the best selling book on the subject and written by the individuals who helped create the crowdfunding laws.