There is a new investing strategy that is sweeping across the world. It is called Crowdfunding and was made legal in the US under the Jumpstart Our Business Startups Act (JOBS). The numbers are quite amazing. In 2010 $.81 Billion was raised, in 2011, $1.47 Billion, in 2012 $2.01 Billion and is projected to reach $5.1 Billion. In 2013 1 Million individual campaigns were launched last year. The two questions that come to mind are what kinds of campaigns are offered and how does one go about getting started.
Here are just a few categories where campaigns have been launched:
Seed Stage Businesses
3rd World Issues
Tech Start Ups
Loans to Recent College Graduates
Motion Picture Production
Free Software Development
In its most basic form a crowd funding campaign can be started by one individual or a group of friends who agree to fund a particular project. Some entrepreneurs have used social media to gather investors. The projects of this kind are unregulated and decisions are agreed upon among the project originators and the investors. The most common arrangement is for the investors to gain an equity share of the project.
When it comes to fund raising, we have three main strategies. One way is to set a dollar amount on the project and if that total is not met, all the money is refunded to investors.
A second strategy is for the money to be pooled and used to finance projects even though the target goal has not been met. In this case the money is not refunded.
A lesser used strategy is called Bounty where all of the money is given to the one who completes the project.
One popular target sector is Commercial Real Estate. Here investors receive a share in the property and receive a portion of revenues generated from the property.
Another way to launch your project is by using a Web Based Platform such as Kickstarter. They will do most of the work for you, including managing funds, raising funds and doing due diligence on behalf of the investor. They will take a cut of the capital depending on the size of the offering.
In addition to Kickstarter you can go to http://marketingmoxie.biz/the-big-list-of-crowdfunding-sites/ for a comprehensive list of more an 100 crowd funding platforms, many with the advantages and disadvantages given.
There is still another strategy under review by the Securities and Exchange Commission that would allow crowdfunders to issue stock to investors. Suggested guidelines are that investors with a net worth of $100,000 would be allowed to invest 5% of their net worth up to $2,000. If their net worth is more than $100,000, they would be allowed to invest 10% every 12 months. Projects under $500,000 would not have to file with the SEC but must provide detailed information to investors. Funding platforms would be required to have a licensed broker/dealer. These guidelines should be finalized in early 2014.
This discussion is not to suggest or encourage you to invest in Crowdfunding. You must decide if this type of project is suitable for your investment needs.