Crowdfunding – How Crowds Are Funding Ideas Reply

Crowdfunding has taken off with websites like Kickstarter which allow entrepreneurs, inventors and creators to pitch their innovative ideas to potential funders/investors to raise start-up money for their projects. Kickstarter is an example of REWARD based crowdfunding which offers a reward to investors for their financial sponsorship. While reward crowdfunding may be the most well known and popular type of crowdfunding… another type of crowdfunding is EQUITY crowdfunding. As the name suggests, equity crowdfunding gives investors equity in the business being funded instead of a reward.

Here are a few noteworthy points on crowdfunding:

  • The two types of crowdfunding are regulated differently because giving a reward verses a security or equitable interest invokes different laws and regulations.
  • Some of the popular reward crowdfunding websites are: http://www.kickstarter.com, http://www.indiegogo.com, http://artistshare.com/v4, http://www.quirky.com/
  • Each reward funding website operates differently. For example, the fees charged by the sites (generally in the range of 4%-9% of the money raised) as well as the sites policies for what happens to pledged contributions if the target goal isn’t met… vary website by website.
  • Once an idea is posted to a crowdfunding website… it CAN be copied! (You must protect your Intellectual Property!)!!
  • A few of the most funded reward crowdfunding projects earned over $1-$2 million dollars (the projects were for: a video game headset, an LED light bulb controlled with a smart phone and a 3D printer).
  • Reward crowdfunding websites do not necessarily regulate fulfillment of the promised rewards. (In Quest v. Singh, the entrepreneur who wasn’t able to deliver promised rewards was sued by a funder and ended up going bankrupt).
  • It can be argued that equity crowdfunding over regulates initial offerings by requiring a licensed intermediary, limiting the capitol raised to $1million a year, and placing significant burdens on the intermediary and issuers. (Title 3 of the JOBS ACT).
  • SEEDERS (http://www.seedrs.com/ based in the UK) is the first equity crowdfunding platform to be granted regulatory approval anywhere in the world.

This post is dedicated to my dear departed colleague and mentor, D. Caplan, who was an incredibly entrepreneurial attorney with his eye on the development of crowdfunding.

See also: JOBS ACT: http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf; JOBS ACT Q&A http://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm; Proposed Amendments to the Prohibition Against General Solicitation and Advertising in Rule 506 and Rule 144A Offerings: http://www.sec.gov/rules/proposed/2012/33-9354.pdf; CROWDFUND ACT: http://www.opencongress.org/bill/112-s2190/show; http://money.cnn.com/galleries/2012/technology/1204/gallery.crowdfunding-startups/index.html; Medstartr – a health and medical focused crowdfunding platform: http://wp.me/p10nNq-mN; @iplegalfreebies and www.kasterlegal.com.

BY: Vanessa Kaster, Esq., LL.M.

For personalized legal services you are welcome to contact me at vk@kasterlegal.com

 

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