Crowdfunding is a way that businesses can seek money from a “crowd” to start-up, finance a new product, or expand their operations. Instead of pursuing big VC’s and investors, businesses pursue the crowd. The “crowd” pledges money to the effort – could be a start-up, cause or non-profit, in response to an appeal or request. The power of the “crowd” makes small donations significant.
In the U.S., there are two types of crowdfunding – reward-based and equity-based.
Reward-based crowdfunding: Funders receive a reward of some type for making a donation to a crowd-funded project. These rewards are predetermined and usually vary depending on the amount contributed. Kickstarter and Indiegogo are some of the reward based crowdfunding platforms.
Equity-based crowdfunding: Up until 2011 equity-based crowdfunding was not legal in the U.S. Equity-based crowdfunding allows people to invest, even small amounts of money, in projects and, in return, receive a small piece of ownership of the project, somewhat like buying stock. But with the new Jobs Act, passed in April, 2012, US is going to allow equity-based crowdfunding. Once the regulations are set in place, this development could prove a boon for U.S. small businesses, who are seeking capital during the economic recovery.