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JOBS Act Permits Crowdfunding for New Business Ventures

April 25, 2012

New start-up funding option emerges for entrepreneurs

The recently-passed JOBS Act has given new life to a novel business investment model that many new age small business owners are finding much less risky or difficult. For those seeking business investment in Sacramento, it may very well be cause for celebration.

This business investment model is called crowdfunding, and it may be the future of securing start-up capital for business ventures. Crowdfunding works on the premise that it is easier to get many people to pitch in a little bit than it is to get comparatively few people to pitch in a lot. Through web sites like Kiva, Kickstarter, Crowdtilt, and IndieGoGo, small business entrepreneurs are finding it much easier to connect with groups of small value investors who are willing to pool their resources together in support of a business venture.

This model differs greatly from the traditional business start-up model. Traditionally, those wanting to start a business in Sacramento needed a Sacramento business lawyer and a source of start-up capital. The traditional sources of start-up capital were a) one’s own savings; b) a bank funded business loan; or c) funds accumulated from a business investor.

Each source of funding had its own drawbacks. Few business entrepreneurs have enough of their own savings to launch a business, and many of those who do are unwilling to risk the entirety of their savings on launching a business. Bank loans were similarly risky in that high interest rates could eat into the profitability of the business, and if the business flopped, the business owner could be on the hook for considerable debt. Traditional business investment was a difficult source of funding because there are few people out there with enough capital to invest in the launching of a business, and fewer still who would invest large sums of money on certain business models they deem to be risky.

Crowdfunding eliminates the need for any of these three traditional funding sources. Much like it is easy to convince huge numbers of people to donate small sums of money to a political campaign, disaster relief, or to non-profit online software ventures like Wikipedia or Firefox, it is similarly easier to convince the average investor with a small amount of extra capital to risk that small sum in conjunction with their peers. Pooling the funding sources eliminates much of the risk in business investment, as the gains are proportional to the amount invested, and the losses are marginal and spread across many peer investors. In short, the low risk-modest reward model brings more investors to the market since comparatively few investors are capable of absorbing losses in the high risk-high reward model.

Are There any Drawbacks to Crowdfunding?

Your Sacramento small business attorney should be able to explain to you whether crowdfunding is right for your business venture. Some things to be mindful of when considering crowdfunding are the reporting provisions of the JOBS Act, which require the business owner to disclose the sources of business funding. Much like political campaigns must disclose their funding sources, your business funding information will be available to any inquiring minds, including your family, friends, competitors, business partners, or vendors. Often, business owners need to hire a Sacramento business law firm to assist with these filings.

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