There are two basic kinds of crowdfunding:
- Equity – The SEC has released new regulations that allow online equity transactions through crowdfunding platforsm specializing a an intermediary. There are very specific rules that must be followed:
- People with either a net worth of $1 million or making at least $100,000 a year may invest up to 5% or $20,000 a year. If their net worth or income is greater, they may invest up to 10% and capped at $100,000.
- Companies looking to raise money may crowdfund up to $100,000 without CPA reviewed financials but with financials certified by company executives.
- For equity raises over $100,000 but less than $500,000, the financials must be pre-reviewed by a CPA.
- For $500,000 to $1 million, which is the maximum allowed via crowdfunding, fully audited financials prepared by a CPA must be provided, and, annually thereafter, issuers must file operations and financial statements with the SEC and with investors.
- Rewards – This type of crowdfunding is open to all, for-profit, nonprofit, individuals, artists, musicians, scientists, anyone. In exchange for a contribution, a product or gift may be given. Two kinds of funding may be accomplished:
- Flexible – regardless of whether you meet your goal, you receive whatever you have raised minus platform and merchant fees.
- Fixed – Only if you reach your funding goal do you receive the money, again minus platform and merchant fees.
Crowdfunding has opened an incredibly creative marketing tool chest. There are successful examples of numerous innovative for-profit strategies:
- Ubuntu Edge broke numerous records raising close to $13 million within 30 days against a fixed goal of $32 million. Why did they choose such a large goal? Most likely because they are an operating system developer with no intention of shipping products. They wanted to gain attention and traction with cell phone manufacturers by proving the market for their operating system!
- Oculus Rift, a gaming headset, raised over $2 million in August of 2012, shortly after Obama signed the JOBS Act. They “pre-sold” product before it had been manufactured, ultimately shipped product, went through 2 equity rounds of investment and finally sold the company for $2 billion to Facebook less than 18 months later in March 2014.
Although these are two exceptional examples, they are note-worthy due to the innovative strategies being employed by companies using crowdfunding to market their for-profit products. Having access to the crowd to make marketing decisions that before required focus groups, alpha and beta market tests, and often ended in failed and costly product introductions, is a highly valuable business resource.
So when you are considering whether to use crowdfunding to raise money, think again. Is that your most valuable goal? Instead, does it make sense to utilize a rewards-based, fixed funding goal that you actually don’t want to reach in order to generate buzz and test the market acceptance for a new product your OEM customers are currently ignoring? Or perhaps you need market intelligence on new product features or accessories before entering into expensive production planning and implementation. Better yet, maybe you’re actually after equity investment money and want to generate buzz to encourage back-room discussions with investors who may have questioned the risk of market entry!
The goal doesn’t always have to be money. Think carefully how to interlace your investment strategies with market tests accomplished via rewards based crowdfunding!