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Equity Crowdfunding: a New Funding Source for IT-projects

09.09.2016 Pavel Сherniavskiy
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Equity Crowdfunding: a New Funding Source for IT-projects

In May 2016 the JOBs Act has become law in the US. It is designed to lay the legal foundation for modern investment opportunities. The Act contains some important provisions towards equity crowdfunding – one of the most popular ways to attract financing for startups.

Why exactly crowdfunding has become such a popular answer to the question “how to find money for startup business”? What are the first things to know about this way of financing before working on it? Let’s answer these questions together.

Doubly Beneficial Funding Source for Startups

What is the idea behind equity crowdfunding? It is simple and is based on the interest of people just like you and me. Persons who wish to support a startup (they are called “backers”) have a possibility to contribute funds for an exciting project via an exclusive platform. For their contribution, they receive some special item after money is raised. Item can be anything, from a simple token of appreciation to an early version of the product startup is working on.

There are two major differences between equity crowdfunding and receiving funding for your startup from accredited investors (read: people with financial interests). First of all, working with crowdfunding platforms is not only raising the money your startup needs to launch. It also helps to gather social interest to your project. Registering on equity crowdfunding platforms such as Indigogo or Kickstarter tells millions of people about what you do: this way you do easily gain exposure.

Next to the fact that such exposure is good for your marketing concerning sales, it gives you another advantage. As people learn about your startup, you can receive feedback from your potential customers, live. You may learn about people’s real interests in different elements of what you do before you go into production.

Consider the example of BauBax, a startup producing famous travel jackets with special features, from neck pillows to wireless smartphone chargers. Working with equity crowdfunding platforms, they have gathered about $12 million for their first product – but this was probably the less important part of the plan. Another significant profit for BauBax was the possibility to target their product way more precisely: exactly due to constant feedback from interested backers.

Another important feature that makes crowdfunding an attractive funding source for startups is that it helps a startup to save financial independence in the long run. When financed by backers, you do not have to give equities back. Where in standard equity situation investors would have received a huge return on their investments in successful startups, with crowdfunding you can leave that money to yourself.

What’s New in Equity Crowdfunding in 2016?

The JOBs Act sets some new standards for working with equity crowdfunding platforms for different types of businesses. What are the provisions concerning startups?

The very first one, and at the same time the most concerning for many, is the statement that startups can only raise funds up to $1 million, stated in Title III. While for some startups this amount is more than enough, others have higher expectations. Well, there is also Title IV that specifies: startups may lawfully receive up to $50 million from backers if holding mini Initial Public Offering for their campaign.

The second important point is that one does not need to be an accredited investor anymore to support your startup. Now anyone can contribute, and this is beneficial for startups, of course. Now your backers can be real people, not just investors with the least working net worth of $1 million minimally, you can draw much more publicity to your product. However, the amount of an individual investment stays limited to $100,000.

The JOBs Act is also facilitating the financial audit, previously required in a full form for each startup launching a crowdfunding campaign. This requirement was changed to make crowdfunding a more affordable way for funding a startup, especially a young one. Now you only have to furnish review financial records if you plan to raise more $100,000. Plus, if your goal is less than that, you have very few financing needs.

Crowdfunding: Part of Your Startup Business Plan

As crowdfunding opens a lot of possibilities for your startup, it is important that you take your campaign responsibly. However bright, creative, and innovative your startup business ideas are, conscientiously declaring all information about your campaign is not less important. This should make part of your business plan.

Disclosing all the needed data about your campaign to the Securities and Exchange Commission will help you to avoid violation of the required financial mandate. Depending on your state legislation, you will be necessary to provide information on your safety values, target deadlines, target amounts of money, and even your employee profiles.

This way, designing your startup business plan you can consider crowdfunding one of the most reliable and affordable resources of finance. Do not forget crowdfunding platform can also serve you as a perfect platform for meaningful communication with your customer. Also, take care of documenting your campaign, detailed – and it will pay off!

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