What is Crowdfunding?

Crowdfunding: Is It More Than Online Panhandling?

Crowdfunding is a way of raising money that exists only because of the Internet. Instead of pitching your idea to a bank or investor who gives you one big pile of money, you solicit small chunks of money from a large number of people. It all started years ago when some desperately shameless person erected a Web site, told a hard-luck story, and simply asked the Internet to please send money. I'm not sure it was the first, but one famous example was the Million Dollar Homepage. It was started by a college student who created a 1000x1000 pixel page and sold blocks of pixels for $1 each to fund his college education.

That audacity got widespread media coverage, and behold! People donated just for laughs, or for a link. Amazingly, he reached his goal and made a million dollars. Copycats quickly appeared, but the gag soon wore thin. Untold numbers of "Please Donate" websites appeared, but there was no way to tell which were legit. Then crowdfunding got a little more serious.

Garage bands offered a quid pro quo: listen to free music samples and, if you like what you hear, send money to fund a CD that you can buy. Inventors offered free products or discounts to donors who helped fund their startups. Registered non-profits and eight year-old cancer crusaders got into the game. Then the middlemen smelled money, and crowdfunding platforms like Kickstarter were born.

Kickstarter and The Clones

Kickstarter provides several benefits to fundraisers: a ready-made Web platform designed for such things, complete with credit card processing and Paypal services for receiving funds; a well-marketed destination for people who are looking for things to fund; tips on writing presentations and promoting fundraisers across the Internet; and a modicum of legitimacy, because Kickstarter reviews all fundraising proposals and accepts only about 75 per cent of them. In return for all of this, Kickstarter takes a percentage of funds raised.

Kickstarter is just one example of a crowdfunding portal; others have slightly different business models and cater to different markets. Kickstarter only accepts commercial projects, not charity drives. Indiegogo accepts business and charitable projects. Kickstarter does not charge donors’ credit cards unless a project gets pledges exceeding its stated goal. Indiegogo takes the money immediately, and donors may or may not get refunds if a project doesn’t meet its goal. Wikipedia provides a guide to a number of specialty crowdfunding platforms.

Donations to registered non-profits are tax-deductible, generally. But donations to individuals and for-profit organizations are not, no matter how charitable the cause may be. Read a project’s presentation carefully to determine its tax status.

Generally, money received via crowdfunding is not taxable income to the recipient; donations are considered tax-free gifts even if something of negligible value is given to a donor in return (such as a t-shirt for a donation of $50 or more). If a donor gives more than $13,000, the donor may be liable for “gift tax” on the amount that exceeds $13,000. Consult a tax professional before making any significant contributions.

Raising equity capital is the next frontier of crowdfunding. Equity crowdfunding allows startups to sell shares directly to the general public without a lot of regulatory red tape. Equity crowdfunding services already exist in the UK, Germany, Sweden, and other countries. In 2013, the United States Securities and Exchange Commission will issue rules that allow crowdfunding of up to $5 million in equity financing. Already, there is a National CrowdFunding Association of crowdfunding services to champion this emerging industry.

If you have a great idea, but you lack the cash to get it off the ground, try Kickstarter or one of the other crowdfunding options I've mentioned. If you've already done so, tell us your story here!

Post your comment or question about crowdfunding below...