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Got an innovative new business idea, but don’t have the startup money to get it off the ground? Crowdfunding is the new frontier in financing projects and can provide startups the money they need to get off the ground. 

So What Is Crowdfunding?

As a blanket term, crowdfunding can be defined as a fundraising method by which a third party website connects businesses and projects with potential donors or investors interested in helping the project take off. However, it is not quite so simple. There are two major forms of crowdfunding:

Rewards-Based Crowdfunding With rewards-based crowdfunding, projects reach out for donations and in exchange provide various gifts depending on the level of donation. Websites like Kickstarter, FundRazr and Indiegogo help fund everything from groundbreaking documentaries to the world's tastiest potato salad. But, keep in mind that some sites, like Kickstarter, have "all or nothing" models—if you don’t reach your target goal, you lose all of the money donated. 

Equity-Based Crowdfunding Another alternative is equity-based crowdfunding. Websites like AngelList, CircleUp and Fundable offer equity-based crowdfunding that allows you to sell shares of your company to wealthy "investors." In return, these investors now own an interest in your company. Recent Washington legislation also now permits companies to raise up to one million dollars in capital in a twelve-month period from everyday investors and remain exempt from securities registration. However, don't start collecting towards that million quite yet. It is important to note that not all businesses qualify for this exemption, and a lot of paperwork is required before you start funding.

Crowdfunding Best Practices & Resources

Sure, right about now crowdfunding is starting to sound like pretty easy “free” money. However, like every business venture, there are tricks to getting it right and to avoiding missteps:

Video: This is arguably the most important part of your campaign. While banks care about your credit score, potential crowd-funders care about your story. Kickstarter estimates that a good video can increase your chances of funding by 50%. While the video doesn’t have to be a technical masterpiece, people will quickly lose confidence in your ability to effectively execute your project if your video is unprofessional. It’s worth the investment to work with the right equipment and with filmmakers who know what they’re doing. Include previews of your work, introduce the cast of characters involved, and, most importantly, convey your passion for the project.

Rewards: Give funders incentive to donate, while relating the rewards to the project itself. This way you keep the donation, while promoting the campaign at the same time. Crowdfunding rewards have begun to shift towards marketplace platforms. For example, PebbleWatch, a company that raised a whopping $10,266,845 on Kickstarter, offered preordered watches at a discounted price to the highest contributors. This tactic not only provides funding for your project but may also contribute to its future success.

Include a Budget: A list of your needs will allow your potential funders to know exactly where their money is going. The more you include the more your investors see the potential for a fully realized project. An "unfortunate reality" for many businesses is that they raise their funding goal, and then fail to deliver on their project. Also, remember that for some platforms, if you don’t reach your goal you’ll lose all of the funding you’ve worked to raise. Set the goal at the minimum of what you think you will need.

Know the Facts: While online platforms for crowdfunding seem to remove much of the “paperwork” required to get your business financed, regulations on crowdfunding do exist. In their flurry to grab as much money as possible, businesses often neglect to read the fine print. Viewing crowdfunding profits as “free money” is a dangerous misconception — in reality, it may be taxable income. In addition, in the case of crowdfunding that is other than rewards-based, it may also be subject to regulation as an investment.

Comply with the Equity-based Crowdfunding Rules: Before you begin an equity-based crowdfunding campaign, it is important to make sure you understand and comply with all of the details of the crowdfunding regulations. DFI offers a informative overview of what you need to know to run an equiy-based crowdfunding campaign.

Less of an Inventor, More of an Investor?

Investing may be just a click away these days, but that also means it is easier than ever to forget to read the fine print. When investing in crowdfunding projects, know what you're buying into and be sure to proceed with caution. Organizations like the Department of Financial Institutions advise against going into projects blindly. Before making your next big investment, be sure to check out NASAA's and DFI's lists of precautions and advice for the informed crowdfunding investor.