Crowdfunding is a new way for small businesses to raise funding in a fairly quick manner. The business must post their idea on an approved crowdfunding portal, such as kickstarter.com. Some advantages of crowdfunding are that anyone can donate almost any amount, large or small, to any business or project that they believe is a good idea. The company has to disclose their idea on the crowdfunding website, and set a goal.
However, there are several disadvantages to crowdfunding. By law, businesses are limited to raising a total amount of $1 million through crowdfunding. Individuals are limited to the amount of money they can donate to crowdfunding per year. There are also several costly requirements that must be met. If a company decides to raise funds through crowdfunding, then they must register with the SEC. They are limited with the amount of advertising they can do, and they do not know anything about their investors.
Private placement memos are a great alternative to crowdfunding. The limitation on the amount of funds they can raise is significantly higher than the limit on crowdfunding. By using accredited investors, under Regulation D, business will not have to register with the SEC. There are fewer restrictions, thus streamlining the investment process. Accredited investors are more interested in the long term results rather than the short term, and bring with them their professional network as well as their expertise.
This article was written with the help of this Forbes article titled “The Trouble with Crowdfunding.”