A couple of years back, the only way you could get your business started was either to choose to take on debt and get a loan, and then raise money through friends, family members, and angel or venture capitalist investors, or to save up the money yourself. Then the innovative idea of crowdfunding entered the scene and, all of a sudden, the game changed. This article aims to express the benefits of crowdfunding, explain each form of crowdfunding, and of course, discuss the rise of crowdfunding.

Crowdfunding – The JOBS Act

Crowdfunding is an alternative way of financing where a group of individual investors pool together their small individual investments/contributions and raise enough funds to get a startup company or project off the ground. In the US, crowdfunding is regulated through the US Jumpstart Our Business Act (JOBS Act) under the SEC. The JOBS Act, whose major goal is to increase investor capital for emerging growth companies (EGCs), has included regulations to help create a framework setting out how crowdfunding should work and protecting investors from potential fraud.

The Act allows people to invest in crowdfunding but sets a limit for the amount raised at $5 million for a period of 12 months. The company seeking investors is also mandated to meet certain disclosure requirements on their business and the securities they are offering to ensure all parties involved know exactly what they are getting into. Another regulated feature of crowdfunding is that it has to occur online through a broker or platform that has been registered by the Securities and Exchange Commission (SEC).

The best part about crowdfunding, though, is the numerous opportunities it offers potential investors. Investors with smaller budgets can now invest and enjoy the great returns that used to be reserved for people with deep pockets. Furthermore, startups, projects, charities, and creatives now have an unorthodox way to get financing to start or boost their businesses.

Types of Crowdfunding

Let’s review the different types of crowdfunding.

Donation-based Crowdfunding

Donation-based crowdfunding asks individuals to donate money for nothing in return. This type of crowdfunding is usually done by charities, campaigns, or good causes. In some cases, investors may be offered small tokens of appreciation, such as being publicly acknowledged as donors or gifts. However, most people that participate in this kind of crowdfunding do it simply because they believe and want to show their support for a particular cause.

Debt Crowdfunding

Debt crowdfunding is also known as peer-to-peer lending or lend-to-save. This type of crowdfunding allows startups to bypass the often maddening and complicated hurdles you have to overcome to get a bank loan. A pool of investors contributes their money in the form of a loan directly to the startup or company. The receiver of the loan has to pay back the money with interest after a certain time.

Reward-based Crowdfunding

As the name suggests, in reward-based crowdfunding, investors contribute to a business in exchange for a reward, usually a product or service that the business offers. For example, you may choose to support a business in creating a new product line and get a free product in return. This type of crowdfunding is especially popular with software development companies.

Equity Crowdfunding

In equity crowdfunding, an individual contributes money to buy some part of the business. In short, you trade capital for equity or shares in the business. The number of shares you receive will depend on the contributions you offer. You will also receive monthly or annual dividend returns for your contributions. Just as with any other shares, the value can go up or down, depending on the market, and you run the risk of losing all your money.

Real Estate Crowdfunding (Invown)

Crowdfunding investment in your home or real estate holdings is a relatively new concept, and Invown is one company pioneering this type of crowdfunding. Instead of getting a loan from an institution such as a bank or mortgage lender, a home or property owner lists their property or home on Invown’s funding portal and sets their own terms. Individual investors review the opportunity and invest money in the home or property in return for a stake in the property’s future value. This allows owners to get the financing they need on the terms they set and everyday investors the opportunity to be exposed to a diverse range of real estate investment opportunities.

Alternative Financing

The major benefit of crowdfunding is that it provides businesses and projects with an alternative financing option. Bank loans and traditional forms of financing are not available for everyone. The option of crowdfunding affords people who have struggled with traditional financing options a way to accomplish their dream.

Furthermore, if you have an idea that would not normally appeal to conventional investors, crowdfunding might be the way for you to get your project off the ground.

Validation of concept

Using crowdfunding channels allows you to share your concept with thousands, if not millions, of people. This provides you with an invaluable opportunity to test the public’s reaction to your product, allowing you to gain invaluable insight and feedback that may help you validate and refine your concept.

Marketing

Pitching your concept on online crowdfunding platforms gives you access to millions of people all over the world. This is a great way to gain free marketing on your up-and-coming product and get people intrigued. If you play your cards right, you can use your other social media platforms to show your fundraiser’s progress and use the added attention to direct people to the other products and services you offer.

Crowdfunding sites (or platforms)

Crowdfunding is quickly gaining traction as a suitable alternative financing option for thousands of projects and businesses worldwide. Let us take a look at some crowdfunding platforms that you can use to begin your fundraiser.

Invown

Invown is a new real estate-focused Crowdfunding platform that allows owners to list their homes to crowdfund investment in their properties. Invown allows everyday investors to invest in a diverse range of real estate opportunities with low initial investment amounts.

Benefits
• The owner sets the terms
• Finds are from individual investors, not from institutions
• Potentially more favorable terms than institutional investors can/will give
• Low financial barrier to entry to real estate for everyday investors
• Solid returns and low-risk investment

Keep in mind
• This is an equity investment, not a loan
• Not an easily liquid investment

StartEngine

StartEngine is one of the largest equity-based crowdfunding platforms. It allows ordinary people to invest in startup companies and early growth companies.

Benefits
• It is open to non-accredited investors
• Low investment minimums, as little as $100
• Offers a wide selection of available investments

Keep in mind
• Mainly offers the chance to invest in startups and early growth companies, which are naturally very risky and illiquid

Wefunder

Wefunder is an online crowdfunding platform that allows the general public to invest in startups. It is one of the largest regulation crowdfunding platforms in the world.

Benefits
• It is available to international users
• Low investment minimums, as little as $100
• The platform is easy to use and navigate

Keep in mind
• If you don’t raise enough money to reach your funding goal, you get nothing
• Investing in startups is very risky

SeedInvest

SeedInvest is an equity-based crowdfunding platform that offers individuals a way to invest in startup companies. The platform conducts extensive due diligence on the startups that apply and accepts only 1% of them.

Benefits
• Offers a wide range of available investments
• Allows accredited and non-accredited investors to invest
• Offers a generous cancellation policy

Keep in mind
• Only 1% of applicants are approved
• Investing in startups is generally risky business