What is Crowdfunding?

Category: Finance

A reader asks: 'I see people raising money on crowdfunding sites like Kickstarter and Indiegogo. Is this a legitimate way to raise money, and if so, how can I get in on it?' Get the scoop on crowd funding, and see if it can work to help make your Next Big Thing a reality...

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.
Crowdfunding

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...

 
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Most recent comments on "What is Crowdfunding?"

Posted by:

Jon
06 Dec 2012

Hmmmmmm......

There's this nice little bridge in London UK that I happen to own and could let you get in on the ground floor before it's sold to America....

I also happen to represent the interests of the widow of an African head of state who is looking for an honest representative for her deposits in your country......

OK so the top one is made up but I've had versions of the second one many times by email. Perhaps I'm too old and cynical.....

EDITOR'S NOTE: Too late! The London Bridge was sold to the city of Lake Havasu, Arizona in 1968. It was taken apart piece by piece, and reconstructed at the new site.


Posted by:

Mark Hughes
07 Dec 2012

Note that with crowdfunding, even when it appears that you are 'buying a product' you are actually financing a project that may or may not be successful - even if the project reaches it donation/commitment target.

But crowdfunding 'flips' the normal venture capital fundraising/risk model. Instead of a few investors risking significant amounts of money, crowdfunding asks many investors to risk a small amount of money.

The amounts required are often relatively insignificant (say, under $100) to many individuals.

Other crowdfunding benefits include immediate feedback by the public on whether the project is a good idea. If thousands of people vote with their wallets to support a project, that's valuable info.

Mark


Posted by:

Dwayne
07 Dec 2012

Kickstarter appears to be a completely legitimate operation. I've sponsored two projects so far - I received the first exactly when promised and am waiting for the second to arrive - shipping begins before the end of December but Christmas postal delays will affect when I actually receive the product.

I'm sure that there are several other copycat crowd-funding outfits out there - all I can say is: Be careful and research them BEFORE you send them money. In my case, I spent several days checking on how Kickstarter's previous projects had gone and found no problems mentioned anywhere.

dwayne


Posted by:

[email protected] peerfunding
11 Apr 2013

Yes, I believe as well that equity will be the next frontier of crowdfunding. It has a lot to offer that the world is yet to unfold despite the risks it might bring.


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