Crowdfunding: The What, Who, How, & When

There are numerous crowdfunding websites dedicated to bringing creative projects to light, helping nonprofits gain needed money, and providing platforms for various causes to fundraise by casting a wide net via the web. With the click of your mouse and a card number, you can donate to a venture of your choosing, or you may be someone who wishes to set up your own crowdfunding page on a site such as Kickstarter, Indiegogo, Crowdrise, and the list continues. This blog gives some key information you might find helpful if you’re considering using social media and crowdfunding sites to raise money or to donate. This blog is in no way exhaustive on the topic of crowdfunding, but I have organized some things you need to know in a simple what, who, how, and when informational blog.

What is crowdfunding and what are the common types?

Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people. There are two main models. The most common is the “donations-based” model, which is the primary focus of this blog. The donors are given “rewards” in exchange for pledges. These rewards are usually exclusive merchandise or a copy of the project itself. An example might be a free copy of the album the crowdfunded proceeds will be used to produce. The second model is “investment crowdfunding,” a website like “Crowdfunder” is an example. This is a platform where businesses seeking capital sell ownership in the form of equity or debt. On Crowdfunder, many of the companies issue convertible notes to investors. People who spend money in this model have the opportunity to become “shareholders” with the potential for financial return. The passage of the Jumpstart Our Business Startups Act (JOBS Act) recently expanded access to investing in startups through crowdfunding, the new rules of the Securities Exchange Commission are described here:http://www.sec.gov/news/pressrelease/2015-249.html

Who can contribute to my project and what platforms can I use?

Just about anyone may contribute to your project in the donations-based model. Popular platforms creatives and nonprofits use are Kickstarter, Rockethub, and Indiegogo. Project creators go on these sites, create a profile, and add information to attract a donations. People typically add videos, a descriptive introduction of the project, and a list of rewards given to those who donate. The benefits are numerous. Creatives and nonprofits get to use a popular vehicle to reach the public, create new contacts, and enhance their communicative power using the Internet and social media. This is also true for startups listing their company on investment crowdfunding sites, especially now that the pool of potential investors has been widened by the JOBS Act.

How can I create a successful crowdfunding project?

There is a misconception that producing a crowdfunding project is simple and easy. Yes, the internet can connect you very easily to other parts of the world. However, it requires major marketing and brand building to be successful. The creator must develop a persuasive message that its readers and contributors will be drawn toward to donate. Creatives and nonprofits should carefully craft their own “elevator pitches” in the same way that startups do. The “big picture” purpose of the campaign followed by an exciting reward and an eye-catching display, especially with video content, produces pledges. Once a crowdfunding page is launched the countdown begins to raise enough money to produce your product. It is helpful to not only spread the word about your project, but to keep your donors informed on your progress. Utilizing social media and email distribution lists are the key.

When can legal problems arise and what are my rights in the state of Kentucky?

The ultimate goal is to increase success and decrease risk. However, crowdfunding platforms do not remove project creators from potential liability. Legal issues can still occur despite any disclosure of risks on the platform page. Make sure to read the fine print before donating or creating your own page. Another major issue to consider, if you are not a nonprofit with tax-exempt status, is the tax consequence of your fundraiser. If you earned money, you still owe federal income tax. Different rules apply, however, if the funds given and received are considered a “gift” under tax law. If it is a “gift,” the donor will pay the tax if the gift exceeds $14,000. In addition, you could also owe self-employment, state or other taxes.  If you are donor, giving funds to a tax-exempt organization, you can receive a deduction for your donation. It is important to consult someone or conduct research on the tax liabilities related to crowdfunding specific to your project. Lastly, for people interested in using investment crowdfunding sites, it is important to become familiar with the rules outlined by the Securities Exchange Commission, and in particular, the new rules outlined by the JOBS Act. A lawyer familiar with securities law can help you navigate the process.  

Crowdfunding has great potential to raise money and spread the word about your venture, but it is also important to understand how to run a successful campaign, and any legal, or other types, of consequences related to your use of the platform.