Are you looking to jump on the “crowdfunding” bandwagon?
This trendy method of investing in start-up companies gained momentum after federal
legislation was enacted a few years ago, but the basic idea has actually been around
for centuries.
As the name implies, crowdfunding is the practice of pooling
small investments from a large group of people to fund a start-up company. This
runs counter to the usual method used for initial public offerings (IPOs) where shares of stock are initially
sold to the public on a securities exchange. Although IPOs have several
advantages, the process is often costly and time-consuming, not to mention the
hassles associated with meeting disclosure requirements and other technical rules.
In contrast, crowdfunding now offers a simpler solution.
Prior to 2012,
crowdfunding wasn’t as popular because a company had to meet the stringent
reporting requirements if the number of shareholders exceeded 500. However, the
Jumpstart Our Business Start-ups Act of 2012 (the JOBS Act) increased the limit to 2,000 shareholders. Thanks
to the JOBS Act, the age-old premise of crowdfunding has renewed life.
Virtually
every small business – even those that are unincorporated – may use this
technique to raise capital. Crowdfunding typically takes place over the
Internet through “funding portals.” Some of the most popular websites promoting
crowdfunding are Kickstarter, CircleUp, and Fundable. Do your due diligence
before making any commitments. Of course, crowdfunding is not without
drawbacks. For instance, it could lead to fraudulent activity, shares are
illiquid so there’s little opportunity for resale, and investors may be kept in
the dark about significant events.
Whether you’re considering an investment or trying to raise
funds for your firm, proceed with caution.
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