It might be tempting to start a crowdfunding campaign right now to get your next business concept off of the ground. From fundraising to lending, crowdfunding is a legitimate way to get the money you need to make your next idea profitable. When raising capital from investors, however, crowdfunding can become problematic for some businesses.
Before getting started, there are four things to consider before you begin a capital crowdfunding project for your business.
1. Securities Laws Might Prevent Your Project
The problem with crowdfunding from a capital perspective is that people can send you money anonymously. The securities laws in the United States are very restrictive when it comes to selling an investment to the general public as well – especially if the public isn’t getting anything in return for the investment into your company. Crowdfunding hasn’t been approved by the SEC for business investors as of yet, so getting approved for public funding might cost you more than your campaign could raise.
2. Extensive Financial Reporting Is Required
If crowdfunding is pursued, then there is an extensive level of financial reporting that must be kept in order to prove that the investments are being used in their intended way. If a small business raises money through crowdfunding to develop Product A, for example, they can’t just switch that money to develop Project B later on. It must be shown through proper record keeping that every expenditure is justified. Because of the amount of paperwork that is required, many small business owners ultimately decide to avoid crowdfunding for capital purposes.
3. You Get a Massive Amount of Shareholders
Any time a capital investment is made into a business; this gives that investor a share of the business – even if it is only a fraction of a percentage. This is based on the overall valuation of the business at the time of the crowdfunding. It is entirely possible that a large investor in a crowdfunding campaign could contribute more than 50% and take a controlling interest in that small business. Even if this doesn’t happen, a business is required to send mandated reporting data to shareholders and this can take an extensive amount of time.
4. There Must Be an Exit Strategy
Because there is a lower amount of risk involved with crowdfunding, there is typically no exit strategy involved. There’s no aftermarket for crowdfunding shares either, which means the typical exit strategy is to simply abandon a business and take whatever money is left out of it. This can create future problems because there must still be accountability for these leftover dollars. It also limits the amount of motivation that some small business owners may have to actually succeed.
Crowdfunding might replace some forms of capital funding, but it won’t replace all of your banking relationships. When done properly, it can give your business the independence it needs. Consider these 4 issues before beginning and you’ll be able to make the most out of your next campaign.