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Startup Crowdfunding: What You Need to Know

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I've been interviewed twice over the past couple of weeks about the recent Crowdfunding legislation that was recently introduced. And each time, I've found myself correcting the misinformation about it that the media has been spreading. So in this article, I'll give you the truth about what's going on, and how to leverage it.

Earlier this month, the House of Representatives passed legislation it hopes will give entrepreneurs more access to capital. The legislation is called The Entrepreneur Access to Capital bill. The bill is expected to be both approved by the Senate and the President in the coming months.

The key to the bill is that it exempts Crowdfunding from the scope of the Securities Act of 1933. Let me explain...

Crowdfunding, as you might know, is getting a group of regular individuals (versus banks, venture capitalists or angel investors) to collectively fund your venture.

The problem is that currently in the United States, you can not use Crowdfunding to raise equity for your business, because equity transactions are regulated by the SEC (Securities and Exchange Commission).

Specifically, the SEC limits private equity investments to a total of 35 non-accredited investors (with the basic definition of an accredited investor being someone with a net worth of $1 million or more and/or annual income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000).

Conversely, The Entrepreneur Access to Capital bill will allow equity capital raises of up to $1 million annually ($2 million if the  issuer provides audited financial statements), from an unlimited number of non-accredited investors. The one limitation is that individual investments will be limited to the lesser of $10,000 or 10% of the investor's annual income.

The good news is that the bill will dramatically increase the number of potential equity investors in your company by 30 TIMES. Here's the math: Currently, there are approximately 1.7 million US households that meet the criteria of being accredited investors. But there are 51.7 million US households with household income of $50K or above (that will be able to write equity investment checks for $5K or more).

So, the good news is that the number of potential friends and family, and angel investors will grow dramatically once this bill is passed.

However, there is a key piece of misinformation that the media is spreading. Which is the fact that the massive current success of Crowdfunding on sites like Kickstarter.com and RocketHub.com will NOT be changed by this bill.

Here's why.

The current Crowdfunding sites entrepreneurs are using to raise funding do not offer equity-based funding (which is what the new legislation is about). Rather, these sites offer what I've termed "rewards-based Crowdfunding."

That is, rather than offering funders equity, on these sites, entrepreneurs offer funders rewards. These rewards most typically include products and services.

For example, entrepreneur Scott Wilson had an idea for a product that turned an iPod Nano into a multi-touch watch. So, to raise money to manufacture it, he offered it on Crowdfunding site Kickstarter. One of the rewards he offered was the actual product when it became available. Specifically, for a $25 donation/funding now, funders would get the $34.95 (suggested retail price) product when it became available.

Did this work? It sure did. Over 13,500 people funded Scott, giving him $942,578 in total.

So, the big opportunity is to simply leverage the rewards-based Crowdfunding opportunities that are already available.

Sure, when equity-based Crowdfunding becomes available in a few months you should also leverage that. But realize you'll be giving away equity in your business.

I personally prefer to start with rewards-based Crowdfunding.

Because with rewards-based Crowdfunding you are essentially pre-selling your product your service. And this is the best market research in the world. If you CAN successfully pre-sell your product/service, you probably have a winner. If not, you should go back to the drawing board and save yourself the time, money and frustration of launching a product or service that the market doesn't want.

Suggested Resource: We recently developed a simple-to-follow program called Crowdfunding Formula. The program is a series of videos that walk you through each of the 14 steps to raising Crowdfunding. To access Crowdfunding for your business, check out Crowdfunding Formula now.


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