Opportunities for Small and Medium-size Companies
Since the launch of Indiegogo, one of the largest networks for entrepreneurs, we have seen many small businesses and entrepreneurs flourish and benefit from the aid of this industry. However, being successful in startup fundraising via crowdfunding is not as easy as it seems. It comes with a lot of effort and dedication, but if one puts in the necessary work, they can realize fortunes that go far beyond just the raising of money. The three basic types of crowdfunding are discussed below:
Reward-based crowdfunding
Reward-based crowdfunding involves raising capital by soliciting small amounts of money from a large number of investors, usually over the internet. It has become an increasingly popular way for small businesses to secure capital. On platforms such as Kickstarter and Indiegogo, individuals and companies offer consumers products, merchandise, experiences, or other perks in exchange for pledging money to help them bring a project to life. These projects range from service-based businesses such as restaurants, to creative endeavors such as films, TV shows, and graphic novels, and to products such as gadgets and clothing.
For example, one recently completed campaign on Kickstarter was for The Coolest Cooler, a combination cooler and blender with a built-in wireless speaker (kickstarter.com). Backers could pledge anywhere from $5 to $2,000 and receive rewards ranging from the company’s creator’s signature on a cooler to having the company sponsor an event at their home. For a pledge of $185 ($165 for early birds), backers would get a cooler.
Project creators set a fundraising goal to be met within a certain period of time. In most cases, funding is all-or-nothing: If users fail to meet their goal, they receive no money, and their backers are not charged. If they do meet their goal, the platform typically collects a percentage of the funds they raised as a fee. Kickstarter, for example, charges 5% of funds raised, and its payment processors charge fees of around 3% to 5%.
Equity crowdfunding
Though reward-based crowdfunding is the more familiar face of crowdfunding, companies also practice equity crowdfunding, in which they sell their securities to a large number of investors. Once, only accredited investors using licensed online portals or broker-dealers could buy securities from crowdfunded companies.
New SEC regulations, however, have opened up equity crowdfunding to a wider pool of investors. These rules allow businesses to raise up to $50 million in 12 months and accept investments from unaccredited investors. There are no limits on how much an individual can invest in a Tier 1 company—one with an offering size of $20 million or lower. Individuals can invest up to 10% of the greater or their annual income or net worth in Tier 2 companies: those with an offering size between $20 million and $50 million.
Tier 1 companies must have their financials reviewed by an accountant, while Tier 2 companies must have their financial statements audited and publish annual reports. Tier 2 companies are also exempt from the requirement to register their offerings in each state in which they sell securities.
Donation-based crowdfunding
Donation-based crowdfunding enables individuals, groups, and not-for-profit organizations to raise money on sites such as GoFundMe and YouCaring. Users can raise funds for almost any charitable cause, including a family member’s medical bills, rebuilding a house destroyed by a natural disaster, or sending schoolchildren to a competition. Some charity crowdfunding sites charge organizers a percentage of funds donated, while others, such as YouCaring, are free except for the fees levied by payment processors. Typically, the pledges received from donation-based crowdfunding are considered gifts and therefore are not taxable to the campaign creator.
Weinstein & Co. can assist your company in the process. For one thing, crowdfunding makes a company’s finances more complex – it adds a whole new layer of accounting for the small business owner. The tax returns will become more complicated. Small businesses that have equity investors are going to need better bookkeeping and records, and get information to investors in a timely and accurate manner.
Aside from doing traditional accounting services such as bookkeeping for new companies financed by crowdfunding, Weinstein & Co. can advise startups that plan to raise money through crowdfunding. There’s more pressure on the company to succeed and grow, we can advise in that growth.
Lastly, our firm can also help new organizations keep their investors better informed. Weinstein & Co. can make business cases, provide projections of potential growth, and estimate investors’ ROI on small businesses.
