crowd
There is incredible power and potential in the crowd, especially for social entrepreneurs.My experience in crowdfunding is proof, and has provided new perspective on options in the space, and pros and cons of various forms of crowdfunding.Additionally, this past week, Jenny Kassan of Cutting Edge Capital presented a webinar on crowdfunding options for small businesses—her firm specializes in an emerging equity crowdfunding form called “direct public offering”.

Here are a few broad highlights from Jenny’s webinar, along with my own research and perspective.

 

What Are 3 Crowdfunding Options for Social Entrepreneurs?

 

1) Crowdfunding for donation (aka perks-based, donation-based crowdfunding)Key Features:

  • Anyone can provide funding for a campaign
  • The contribution is a “donation”, often rewarded with perks or benefits—but not equity
  • No financial return for contributors
Pros:

  • Easiest to set up (i.e. no legal requirements)
  • Anyone can contribute from anywhere
  • No limit to the number of funders or amount of funding requested
  • Direct appeal to customers, friends, and family for small to mid range amounts
  • Social entrepreneurs can deliver value through non-monetary perks (i.e. can find ways to create value for the funder, without prohibitive cost to the social enterprise)
  • Can build community, marketing, branding in addition to raising funds
  • Can serves as a way to test out an idea, concept, features, or pricing by getting customer feedback through interaction with the campaign, comments, orders, etc.
  • Can validate concept and attract other forms of funding (i.e. venture capital, impact investment, angel funding, friends & family, etc.)

Cons:

  • Though not often the case for social entrepreneurs, could create backlash for businesses (i.e. for-profit business asking for donations could raise eyebrows). For an interesting take and experience on that, see the TED Talk by Amanda Palmer (also embedded at the bottom of this post.)
  • Can be time-consuming and resource-intensive, especially for larger asks (requiring marketing budget, high touch points for those launching, and involvement on various social media platforms and engagement tools)
  • Is based on goodwill, so if the project changes significantly—it may mean reaching out to numerous stakeholders to inform (and potentially refund)
  • Some platforms require raising all requested funds, or none of the funds are released
  • The platform will take a percentage of the funding raised

Examples: Kickstarter, Indiegogo, StartSomeGood, Crowdrise



2) Crowdfunding by accredited investors under Rule 506(c), authorized by JOBS Act 2012.Rule 506(c) was adopted by the Securities and Exchange Commission in 2014. It essentially allows businesses to raise unlimited funds but only by accredited investors. Under the federal definition, accredited investors are individuals who have a net worth of $1M (excluding their primary residences), or earn more than $200,000 as annual income (for past two years, and expected in current year) or $300,000 annual joint income for spouses. Entities can be accredited investors if they are valued at $5M or greater.Key Features

  • Only accredited investors can invest in a company online
  • A financial return is expected
Pros
  • Can potentially raise an unlimited amount of funding from high net-worth individuals
  • Is a way to attract investors without commitment of traditional, larger initial investments
  • Is a newer form of investment, so may attract different kinds of accredited investors
  • Connects and incentives wealthy, and often well-connected, donors (i.e. accredited investors) to engage and help your social enterprise succeed
Cons
  • Limited to the pool of accredited investors (The SEC has estimated that 7.4% of US households qualified as passing the threshold for being “accredited investors” (an estimated 8.7M households in 2010)— this leaves out over 90% of households across the US alone
  • Newer form of investment, so accredited investors are less familiar (and potentially less comfortable) with this option
  • Requires an attorney and legal formalities

Examples: CircleUp, Wefunder, Launcht



Important Note: The other provision of the JOBS Act that would allow equity investments by non-accredited investors (which we have written about here and here), has not come into effect. The SEC has not yet adopted specific rules around this type of equity crowdfunding investment. Attorney Joe Wallin has an excellent blog post on this titled “Crowdfunding v. Rule 506(c) Offerings”

3) Direct Public Offering (aka investment-crowdfunding, crowdfinance) Key Features:

  • Can offer investment opportunity to anyone
  • Non-accredited investors can participate
  • Financial return is expected

Pros

  • Any type of organization or company (nonprofit or for-profit) can invest for equity
  • Direct investment (no middleman)
  • Can offer any kind of investment (i.e. equity, debt, revenue-based investment contracts, pre-sales, for perks)
  • Is a new form of investment crowdfunding– social enterprises can be ‘first to market’ in raising funds for your cause/in your market
  • Can replace an angel round or Series A round (i.e. past DPO’s have raised upwards of $500K, $1.2M, even $2M)
  • Can build broader community, marketing, and branding while fundraising
  • Can engage in multiple rounds (i.e. is like a ‘faucet’, can be turned on and off)

Cons

  • Newer form—fewer people know/are familiar
  • Requires state registrations (which could mean more paperwork if raising funds across states) and legal formalities
  • Can take 4-8 weeks for paperwork and legal compliance before launching DPO
  • Founders may need to manage relationships with numerous investors
  • Resource intensive and may require professional marketing and media services

Example: CuttingEdgeX

 

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