The Risks and Rewards of Crowdfunding

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Crowdfunding is a promising way for startups to raise money from small investors, but there are a number of issues you need to be aware of before you take the plunge.

Last year’s JOBS (Jumpstart Our Business Startups) Act promises to make it easier to accept small investments, but here are some of the things you need to consider, courtesy of Joe Taylor Jr. at Small Business Computing.

Like traditional angel investments, crowdfunded investment rounds mean you surrender an ownership stake to a pool of qualified investors in exchange for funding. The JOBS Act requires companies to use registered broker-dealers to manage investments and handle paperwork. The process will likely resemble current crowdfunding platforms, with broker-dealers charging commissions on successful investment rounds. The act limits most Americans’ investments to 5 percent of their annual income, with an extension to 10 percent for investors who earn more than $100,000 per year.

But there are a number of caveats to consider before jumping in. Investors may demand a say in how you run your company. It is also possible that an inexperienced small business leader could quickly burn through a funding round without achieving measurable results.

One other issue to consider is your company’s valuation. A crowdfunded investment round could raise the valuation of your company, making it less attractive for bigger investors later on.

We’re still waiting for federal regulations under which broker-dealers can advertise crowdfunded investment offerings, so stay tuned as this important funding option develops.

Adapted from Details and Dangers of Crowdfunding Under the JOBS Act by Joe Taylor Jr. at Small Business Computing.