Picking a Crowdfunding Platform

Crowdfunding can be a great way to raise money as a small business owner, but deciding which platform to use can be difficult.

Businesses should consider the following factors when evaluating crowdfunding platforms: (I) the type of financing the business is trying to raise; (II) the platform’s specialization; and (III) the platform’s terms and conditions

Type of Financing: Contribution and Regulation Crowdfunding

Funds can be raised in different ways through crowdfunding. Businesses can use contribution crowdfunding to seek donations from the public, or give incentive rewards—such as discounts—in exchange for money. Alternatively, under Regulation Crowdfunding (Reg. CF), businesses can issue either debt or equity securities to the public in exchange for money.

Businesses should first consider whether using debt or equity crowdfunding is worth the costs associated with Reg. CF compliance. Equity and debt crowdfunding is more heavily regulated than traditional contribution crowdfunding and businesses that opt for this funding method must abide by the Reg. CF requirements. There is no comparable regulatory regime governing contribution crowdfunding as long as it does not constitute a security; rather, it is primarily governed by state contract law. To do Reg. CF crowdfunding, businesses will need to consult an attorney, whereas contribution crowdfunding may not require legal representation.

Under Reg. CF, businesses cannot raise more than $1 million through crowdfunding offerings in a 12-month period and cannot sell more than $100,000 to an individual investor. Businesses must satisfy Reg. CF’s eligibility requirements, which include the following: they must be U.S. companies, they cannot already be Exchange Act reporting companies, and they must have a specific business plan. Reg. CF also has disclosure requirements. The business must file the Form C: Offering Statement, which provides investors with basic information about the business, business plans, and the business’s financial condition. Progress updates and an annual report must also be filed by the business. Finally, the business may only advertise using a notice that meet Reg. CF’s notice requirements, and, unlike traditional securities, investors generally cannot resell their securities for a period of one-year.

Once a business has decided on a financing method, it should make sure the platform offers the type of financing it desires. For instance, Kickstarter offers contribution crowdfunding, Indiegogo offers contribution and equity crowdfunding, and NextSeed offers debt crowdfunding.

Specialization

Businesses should also consider the platform’s specialization. Certain platforms cater to a specific type of business. For example, Kickstarter focuses on creative projects, such as art, music, and film. Indiegogo accommodates any type of campaign. NextSeed, focuses on “Main Street small business[es],” such as bars, restaurants, and spas.

III. Terms and Conditions

Finally, a business should consider platforms’ terms and conditions. The fees vary between platforms. Kickstarter and Indiegogo, for example, will take a 5% fee from a business’s funding total and an additional 3-5% in payment processing fees. In contrast, NextSeed charges $500 for creating an offering and a 1% service fee. In addition, if the offering is successful, NextSeed will take 10% of the total amount raised. Some platforms also put special restrictions on the business. For example, Kickstarter and NextSeed’s funding is all-or-nothing: if the business does not meet its funding goal, it will not get any of the funds raised. Indiegogo offers both all-or-nothing and flexible funding. Given the amount of crowdfunding platform options, businesses should consider these factors before picking a platform for its crowdfunding campaign.

For additional information consult the U.S. Small Business Administration crowdfunding guide at https://www.sba.gov/tools/sba-learning-center/training/introduction-crowdfunding-entrepreneurs, the Financial Industry Regulatory Authority’s (FINRA) guide on Regulation Crowdfunding portals at http://www.finra.org/industry/funding-portals, and the SEC’s Crowdfunding Release at http://www.sec.gov/rules/final/2015/33-9974.pdf.

Victoria Hines