Crowdfunding as the name stands is a mechanism to fund your project / product from the crowd. The crowd can be your friends , family or people who are interested in your project. Crowdfunding has gained momentum in the past few months and in each US President has signed the JOBS Act (Jumpstart our Business Startups) to officially consider Crowdfunding as a legal way of raising money for your start-ups.
Prior to the bill being passed in the senate. there were no legal means of raising money for your startup in the form of Crowdfunding. The founders always need to approach the angel investors for the funds to start the basic operations of their startups. The first question from *most* of the angel investor is to demo a prototype of the product to be demonstrated. At this stage, most of the startups would just have a business idea in mind and would not have a prototype available. This resulted in funding issues for the startups and most of the entrepreneurs with the business idea were not able to implement the idea.
To energize these entrepreneurs and to encourage the culture of entrepreneurship, Crowdfunding would be the best way to kick start your startup from just having a business idea to have a prototype model of your idea. Once the prototype is available. the entrepreneurs can approach the angel investors / venture capitalists for funding the implementation of the product.
The investors who provide the money for building the prototype / product can get their returns in the following ways
- Equity in the company
- Percentage of the revenue / profit for a fixed duration of time.
- For very small investors, a copy of the product to be available for free when they are available.
The amount of money an investor can invest through Crowdfunding is limited to 5% of their annual income if the income is less than 100k $ and 10% if the income level is greater than 100k$. This is to protect the money of the inexperienced shareholders. A total of 1M $ can be raised through Crowdfunding per year. These companies need not report their financial data if they have less than 1000 investors (which was earlier set to 500 investors)
The obvious disadvantages would be where the Crowdfunded money is not being utilized for the product prototype / model building, but being looted. There is a 90 day time available for the US government to identify the loopholes with the Crowdfunding and finding ways to fix them.
These Crowdfunding websites / Crowdfunded companies has to make sure that the progress of the project has to be provided to all the investors – small or big. In short, the modified JOBS acts certainly looks to be a way in boosting some of the struggling startups wanting to raise money.