What Is “Crowdfunding”? Three Key Aspects You Must Know.

I’m sure I’ll get your attention straight away at the mention of money — and not just any kind of money, but the capital necessary to run a startup business. That’s right — you may be an entrepreneur, but your greatest challenge is amassing a great financial following to propel your big corporate idea, whatever it may be, to the heights of prosperity. It just, unfortunately, takes some dollars to do it.

Thankfully, things have changed in this day and age. No longer do you have to research private investors and develop those long-term relationships, although that traditional method still works just fine. You now have this revolutionary digital strategy unlike anything has ever seen, turning the adage and model clear on its head and revamping it: it’s called crowdfunding.

Explain to Me What Crowdfunding Is

First off, understand that there’s an upcoming surge of new ‘companies’ out there thanks to the Jumpstart Our Business Startups (JOBS) Act, a government initiative approved by the U.S. Senate back in 2012. What’s so different about this legal act? They’ve brought what can be distinguished in corporate America as the emerging growth company, a type of commercial business structure with less than $1B in annual gross revenue.

The key here with that statistic and new development is that it easily applies to all the startups in America you can think — everything from a new barber shop to an enterprising law firm of three to four lawyers on staff. This is a governmental act allowing such small companies to raise the capital they need through what’s called “initial public offerings,” or IPOs, of vital stock for their businesses. They do that by crowdfunding, presenting them with the benefit of avoiding specific financial disclosures and several government requirements for a 5-year period.

I meant what I said when I said that it’s “turning the adage and model clear on its head.” Instead of trying to focus on a few private investors for large sums of money, crowdfunding does the opposite; you’re raising funds at small amounts with a large number of individuals, groups and business, hence why it’s called “crowd funding.”

You might freak and say that it’s a far-fetched idea, though, but in this day and age where the Internet can get you in touch with millions of people at the press of a button, it’s not inconceivable by any stretch. In fact, just about anyone can do it.

The First Aspect You Need to Know: Kickstarter and Indiegogo

I wouldn’t be surprised if you’ve heard of these two sites. They utilize crowdfunding quite well. Films out in Hollywood have actually focused on funding through these sites, to be honest.

This takes crowdfunding at its core, even outside the realm of the JOBS Act, simply focusing on volume of donations. Artists have done it, filmmakers have done it, all kinds of entrepreneurs do it. Typically, you offer your idea, make your case and ask for the donations, plain and simple.

Oftentimes you can provide some sort of incentive or reward for the donation, and numerous people on the Internet may just get interested in your project enough to fund you thousands, possibly millions of dollars, just because you put yourself out there on either of these two sites. It’s not a bad stretch.

Focusing on the JOBS Act, Though, Is Somewhat of a Pretty Good Deal

Crowdfunding from a donation standpoint, though, may not be your cup of tea, but the JOBS Act still can give you the resources necessary to raise small amounts of money, up to $1MM in one year, through the use of financial intermediaries. You can do all of that through a crowd of smaller investors, pooling all the money together, and the best part? You can do all of that without being a publicly traded company.

There’s a slight risk, though, but if you play the cards right, you might come out on top with sizable capital to launch your business. One thing you have to keep in mind is the prospect that you’re deregulating equity investment efficacy, potentially abusing the freedom you have in bringing in inexperienced investors over a corporate idea that might not fly too well.

Additionally, because you don’t have to conform to those requirements publicly traded companies have to abide by, there’s even more risk as you don’t have the same professional control over internal finances of the company.

Should I Get in On This or Wait?

That’s the last thing — and, in many ways, the most important thing — you should think about. This new initiative is still fresh and green, under development, with a few kinks in there. Be patient. Part of the JOBS Act is the regulation, the safeguards to ensure that investors startups approach are, in fact, accredited, meaning they have a personal net worth of at least $1MM, or an annual income of more than $200K.

Changes have occurred, though, in the initiative, and for good reason. The government’s trying to find the right balance. As it stands, you’re given the chance to take your money and invest it in companies you absolutely know will be successful — such as Facebook. Of course, there may have been many people out there who thought Facebook was going to fail miserably. Look at the corporation now.

The point is this: you’re bound to see more changes, so please consult with your qualified business lawyer before making the jump into crowdfunding. To this day, you can approach funding portals as an alternative to traditional brokerages, limiting the risk to your prospective investors, but even then, the rules are rather gray in color.

The Last Piece of Advice: Wait Until You See the Black and White

Definitely don’t rush. It’ll happen. Strike at the right time, and I can assure you this important fact: your business will amass the capital you need for launching, even as times change and the landscape morphs again and again.

The key to this is being ahead of the game, every step of the way.

Matt Faustman is the CEO at UpCounsel. You can follow his business insights on Twitter at @upcounsel.