CROWDFUNDING

Basics

What is crowdfunding?

By definition crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”
There are four primary models of crowdfunding: Equity, Lending, Reward and Donation Crowdfunding.
Equity crowdfunding enables companies to raise money in exchange of equity from groups of investors through online accredited portals.

Lending Crowdfunding encompasses two subcategories: (a) a return of principal only model, and (b) a return of principal plus interest model.

Reward/ Pre-Purchase Crowdfunding: Under the reward/ pre-purchase model, a crowdfunder receives either a reward (e.g., a personal “Thank You” email from the entrepreneur or a customized T-shirt) or the actual product being funded (once the entrepreneur completes the project, of course). Critically, the crowdfunder does not receive a financial interest in the business.

Donation Crowdfunding: Under the donation model, the crowdfunder receives nothing in return for his or her contribution—the crowdfunder is simply making a donation to a project.

What is equity crowdfunding?

Equity crowdfunding is the name given to the process whereby people (the crowd) invest in a company in exchange for shares.

It is a new capital raising and investing method. Federal equity crowdfunding (Reg CF) enables startups and small businesses to raise up to 1 million capital/year from non-accredited and accredited investors, through funding portals. Non-accredited investors are considered all individuals with an income lower than $200 K/year.

In the US to be considered an accredited investor, one must have a net worth of at least one million US dollars, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year.

Starting May, 16 2016 when the Regulation Crowdfunding became active, non-accredited investors can be shareholders.

What is Regulation Crowdfunding (Reg CF)?

Starting May 16, 2016 under the National Regulation Crowdfunding (Title III of JOBS ACT) US startups and small businesses can raise up to $1 million/year from non-accredited and accredited investors, US or non-US citizens.

Companies are required to present tax return disclosure if they raise less than $100,000; between $100,000 and $500,000 the company has to present reviewed financials and between $500,000 and $1 million audited financials.

Accredited or non-accredited individuals, are allowed to invest over a 12-month period up to 5% of income if less than $100,000 and 10% otherwise;

What is “equity offering”?

Equity offering are small stakes in a company sold to individuals. In return of the investment, the investor receives a form of ownership, commonly referred to as “equity” or shares.

What is an “issuer”?

The term “issuer” is defined as the “person who issues or proposes to issue any security.” On a more common language, issuer is the entrepreneur that offers equity in his company in exchange of capital.

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