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Using Crowdfunding to Bring Businesses to Life

Using Crowdfunding to Bring Businesses to Life

The crowdfunding phenomenon has helped out many a charitable cause or artistic project. There is also the potential to attract venture capital for new businesses, but entrepreneurs hoping to tap into the wisdom -- and checkbooks -- of the crowd have been put on hold while federal regulators finish looking into the issue. In the meantime, entrepreneurs can do a little legal homework to find out if crowdfunding is for them.

By Theodore F. di Stefano E-Commerce Times ECT News Network
04/25/13 5:00 AM PT

It has become a Web phenomenon, but many people still may not have heard of crowdfunding. In its simplest terms, it is a way an online group of individuals can come together to fund a particular project. To date, most of the projects funded are charitable causes such as free software development, scientific research, disaster relief, the support of artists by a fan base, and civic projects.

If you were search the Internet for companies that provide a platform that brings together projects and donors, you would find that most of the successful recipients of funding have some sort of charitable or artistic purpose.

However, there are other potential uses of this method that could involve the creation of new businesses.

The Beauty in Crowdfunding

Reflect for a moment on the elegance of the crowdfunding model: It consists simply of the originator, the donors, and a platform to bring the two together. The beauty of this model is that it is primarily Internet-based. This means that it is an excellent way by which to identify and aggregate a population of like-minded people in order to solicit funds.

The model could serve as a perfect source of funds for a startup company. To date, most startups are usually privately funded, either through a venture capital firm or through a public offering. In many cases, however, finding startup funding is very difficult.

Most individuals don't have the wherewithal to come up with the necessary funds for a startup, or don't know where to go to attract private investors. Venture capitalists can be extremely choosy about their investments. The last alternative, a public offering, is in and of itself very costly and time-consuming.

Imagine, then, that you could find a platform, an organization of some kind, that will connect you with the ideal set of investors. I have no doubt that such platforms will be available in the not-too-distant future.

What's holding the process up? None other than the Securities and Exchange Commission, which is working on final regulations of the JOBS Act, signed into law by President Obama. The SEC is concerned that unscrupulous people will take advantage of this emerging fundraising model and prey upon the non-sophisticated investor.

The Latest on the JOBS Act

From what I'm reading, there are companies set to use the crowdfunding model in order to garner much needed capital. They're just waiting for the final regulations on the JOBS Act. When those regulations come out, I have no doubt that there will be a rush of small companies just waiting to get at the potential capital that crowdfunding can access.

This particular issue was covered in January by New York Times reporter Amy Cortese in her excellent article, "The Crowdfunding Crowd is Anxious." Cortese highlights what she sees as the current status of the SEC regulations and charts the mood among dozens of startups that are getting their crowdfunding portals ready for business.

The article mentions Kickstarter and Indiegogo, two sites that have received a lot of publicity for their early crowdfunding success. It also points out that the SEC does not cover rewards and donation-based crowdfunding until financial returns are promised.

It appears, then, that help is on its way.

Too Good to Be True?

Crowdfunding, like any other funding source, will have its dangers. Naturally, one shouldn't blindly try to fund a startup through such a model. The first thing that I would advise is that you speak to a competent securities attorney who has experience in dealing with the many ramifications of a public offering.

If your startup has some type of intellectual property as a key asset, I would be extremely cautious and not go blindly into this type of funding without some protection. Again, I would advise you to seek legal advice as to the specifics.

The obvious forms of protection, as I see it, come from such things as patent application, copyrights and trademark filings. These types of protection should build some form of firewall for your IP.

There is also an organization called Creative Barcode, which Wikipedia describes as "a nonprofit organization that allows members to share new ideas without the risk of unauthorized copying." Embedded digital codes, private disclosure guidelines and World Intellectual Property Organization dispute resolution round out this particular service.

Once regulatory hurdles are cleared, crowdfunding may be a viable alternative for your organization or startup. If you aren't sure, seek some legal advice, and good luck.


Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at Ted@capitalsourcepartners.com. Follow Theodore F. di Stefano on Twitter.


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