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Is Crowdfunding for You? If So, Which Type?

Mihir Gandhi

Crowdfunding platforms helped individuals and companies around the world raise $16.2 billion in 2014, according to research firm Massolution. Crowdfunding likely grew out of microfinance, or microlending, which has been around for centuries as a way to help people climb out of poverty. The first microlending website appeared in 2005, the first US peer-to-peer lending site in 2006, and in 2009, Kickstarter launched as a new way to fund creative projects.

Projects now range from social causes to app development, and everything in between. The JOBS Act has declared that crowdfunding should be an option for businesses in the U.S. You’re not alone if you are wondering if there’s a type of crowdfunding that might help you raise much-needed capital for your business.

Equity Investment
Equity crowdfunding, as the name suggests, allows investors a share of equity in exchange for their investment. While the JOBS Act has opened the door to equity crowdfunding, the SEC hasn’t yet walked through it, and its corresponding rules aren’t expected to be adopted until late 2015. Once that happens, small or emerging businesses will be able to raise up to $1 million in capital from the general public via crowdfunding platforms, without triggering other federal securities laws.

Royalty Based
Also tied up in the wait for SEC regulations, royalty-based crowdfunding provides investors with an opportunity to earn a percentage of future revenue. For entrepreneurs, this can be attractive because they don’t have to give up equity; for investors, it is attractive because they could earn back more than their original investment.

Reward Based
Under this model, entrepreneurs pre-sell a service or product without incurring debt or giving away equity. Typically used to fund the launch of a new offering, reward-based crowdfunding has been used to help fund things like software development, cool new apps, inventions, and scientific research.

Debt Based
Also sometimes called peer-to-peer lending, this type of crowdfunding is easier and less costly than a bank loan for many entrepreneurs. It’s also easier for an investor to buy into because there is a promised repayment with a small return. This type of platform is suitable for those with an established customer base and stable cash flow, which will ensure you’re able to make the debt repayments.

Donation crowdfunding projects are used for political campaigns, charities, or social causes - rarely for entrepreneurial endeavors.