One of the newest forms of financing available to entrepreneurs is something called crowdfunding. Instead of traditional routes of obtaining funding through banks, venture capital, or wealthy individuals a new breed of entrepreneurs are obtaining funding via numerous small donations using social media or new online platforms such as Kickstarter.com. A recent example of a crowdfunded venture is the movie Veronica Mars, which was funded by numerous small donations from fans of the TV show.
Until recently, crowdfunding has been limited to donations rather than actual investments. Individuals who help fund the business have not received a share of the profits of the new venture. Instead, they typically get some kind of alternative reward. For example, people who donate money to finance a new film might get a chance to meet some of the movie stars or be given a small role in the movie. The reason crowdfunding has been limited to donations rather than investments is that once you start offering a share of the profit to those who donate you are subjecting yourself to huge number of laws and regulations designed to protect investors. But these laws don’t apply if you provide alternative rewards in exchange for donations.
But in a very interesting new development, in 2012 Congress passed the JOBS Act which removed some of legal barriers to using crowdfunding and now allows entrepreneurs to offer investors actual shares in the profits of the ventures rather than the small rewards typically offered to donors. This will potentially lead to a dramatic growth of opportunities for entrepreneurial financing. However, the removal of regulation may also lead to lawsuits or allegations of fraud against entrepreneurs whose ventures fail to make a profit.
Carefully review the Pearson tutorials as well as Sherman (2012) or The Staff of Entrepreneur Media, Inc. (2015) for an overview of traditional sources of entrepreneurial finance. Also take a look at the following articles on crowdfunding:
ElBoghdady, D., & Harrison, J. D. (Oct. 24, 2013). SEC approves ‘crowdfunding’ plan. The Washington Post [ProQuest]
Tillotson, K. (Nov. 14, 2012). Crowdfunding gears up for a fresh start. McClatchy – Tribune News Service [ProQuest]
After you’ve finished your research on crowdfunding, write a 3-4 pages paper addressing the following questions:
- Do you think the JOBS Act and its new regulations regarding crowdfunding will be beneficial in the long run? Or will it only increase fraud and lawsuits?
- Under what circumstances do you think it would be preferable for an entrepreneur to use crowdfunding instead of more traditional forms of financing such as angel investors, bank loans, personal savings, or venture capital? Be specific in your answer regarding advantages and disadvantages of crowdfunding versus the other types of funding discussed in Sherman (2012) or The Staff of Entrepreneur Media, Inc. (2015).