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Crowdfunding to Raise Money?

Crowdfunding to Raise Money?

On October 23, the Securities and Exchange Commission approved the so-called “crowdfunding” proposal. By doing this, the SEC made it possible for small businesses to raise money over the Internet by basically selling shares of their company to anybody in the general public. This leads to the following question: should you go ahead and sell shares of your business to random, unaccredited investors? Ultimately, the answer depends on just how well this form of investment (formally known as equity crowdfunding) fits your particular business model.

Which Is Best For You: Debt Or Equity?
To determine whether equity crowdfunding fits, you first need to figure out whether you prefer raising debt or selling equity. You should get a conventional loan (and thus accumulate debt) if you don’t expect your business to skyrocket to success. Why? Because those investors will only invest in your company if you can prove to them that it’s a worthwhile investment. That is, you must be able to show that the investment will result in a huge ROI. Likewise, you should go the debt route if you aren’t too keen on sharing future profits. Selling equity means sharing profits with your investors. Also, go with a loan if you want to maintain strict control over all business operations. People who buy equity in your company also buy the right to participate in company meetings and decisions. The last thing to keep in mind is that selling equity means setting up some sort of exit plan. Eventually, your investors will want to cash out and ‘exit’ your business. This usually occurs when a company either goes public or is purchased. If neither of these outcomes seem likely, then the debt route may be best.

What Is Best For You: Venture Capitalists Or Public Investors?
One big problem with equity crowdfunding is that it is currently capped at $5,000/year per investor. Thus, to raise boatloads of money, you will need a lot of investors. Unless you can recruit (and manage) that many investors, it may be more prudent for you to speak with venture capitalists instead. Furthermore, equity crowdfunding is only good for raising money once. Trying to raise money multiple times through the crowdfunding route can cause a lot of issues. You must offer “pro rata” rights to all initial investors, as their investments effectively get diluted over time once additional investors come on board. Make certain you keep these factors in mind because venture capitalists are not too fond of small businesses that elicit money from random investors. Plus, general-public investors cannot offer you any of the professional mentoring and advice that you would receive from accredited investors.

So Is Crowdfunding Right For You?
The simple fact is that you need to consider the benefits and liabilities associated with equity crowdfunding. It has serious consequences and repercussions. Keep in mind that it also holds a lot of potential. What you need to do is closely analyze your business and determine which path works best for you.