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Sunday, February 13, 2011

CROWDFUNDING - Capitalization Revolution For Start-Ups and Growing Businesses.

CROWDFUNDING - Capitalization Revolution For Start-Ups and Growing Businesses. [Update at 02.13.2011]
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Note: This is a re-publication of and an addendum (in the form of a "HOW TO") to an article originally titled "CROWDFUNDING - Entrepreneurial And Small Business Growth Capital Made Accessible," first published in December of 2010. It is going to become increasingly popular as conventional approaches to financing continue to become increasingly complex, highly-regulated, and inaccessible to the productive Entrepreneurial Sector, where money can be deployed most efficiently to re-build a solid, sustainable economy -- one in which a Middle Class can thrive, employment proliferate, productivity reign, and innovation  triumph over a status quo which benefits so few and destroys so many. Genuine productivity and incentives to promote the same are needed where governments and big businesses are so heavily invested in sustaining the status quo of greed and deception at the possible expense of  entire nations and a still-promising species.  -- Douglas Castle, February 10th, 2011. 

(http://theglobalfuturist.blogspot.com/) , (http://theinternationalistpage.blogspot.com/) , and TNNWC Group (http://www.tnnwc.com/)
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Q: Could this herald the beginning of a revolution in the traditional capital markets? Is this new idea going to create a needed redistribution of significant operating and growth capital and liquidity into the Emerging Enterprise and Small Business Sectors? What might be the potential impact on the domestic and global economies, employment and the future distribution of wealth?

A: Yes. And it is starting to happen already. I predict a steadily-increasing volume of Crowd Funding capital raises (in amounts ranging from $5,000.00 US to $150,000.00 US during the course of this year (2011), and predominantly in the United States. By the middle of 2012, this technique, with all of its advantages, will spread rapidly throughout Europe and parts of Asia.

Comment: TNNWC Group has begun focusing a great deal of attention to this amazing new vehicle, and intends to assist a number of companies in launching their own respective Crowd Fundings. At present TNNWC is mobilizing its research capabilities and Human Resources in order to become the acknowledged leader in assisting businesses in acquiring need capital through this method.

The disclaimer below (dated 12.19.2011) still applies to all information covered in this article, regardless of where it may be published or re-published. Please read it, and understand by your reading or other utilization of this article, you agree to the representation, warranties and terms:

Note: 12.19.2010 - The article which follows was written by Douglas Castle for simultaneous publication in THE NATIONAL NETWORKER WEEKLY NEWSLETTER/ TNNWC WEEKLY NEWSLETTER™ and THE GLOBAL FUTURIST™ Blog. It may be reproduced, transmitted or republished without permission provided that 1) the article is printed in its entirety without edit or deletion; 2) all hyperlinks are left live and intact; and 3) attribution is given to both the author and both of the aforementioned publications by name. This article does not contain, and should not be regarded or construed as investment, tax, accounting, financial or legal advice under any circumstances. No sale or solicitation for the purchase of any type of securities or other financial investments is made or should be in any way inferred hereby.


Further Information:
THE NATIONAL NETWORKER WEEKLY NEWSLETTER™ and other TNNWC™ publications –
THE GLOBAL FUTURISThttp://TheGlobalFuturist.blogspot.com
Douglas Castlehttp://www.LinkedIn.com/in/douglascastle, http://aboutDouglasCastle.blogspot.com, or http://www.blogger.com/profile/00521679449074072919

The Initial Article, as appeared in December of 2010, follows. If you are fully familiar with it, you may wish to scroll further down immediately to the portion labelled "ADDENDUM". 
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CROWDFUNDING
 
Preface: Here is a basic definition of Crowdfunding from Wikipedia, the free encyclopedia:

“Crowd funding (sometimes called crowd financing or crowd sourced capital) describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. Crowdfunding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company or small business.”

This article was inspired through a letter which I received from Ashok Margam, a Linked In colleague and co-member in a group about crowdsourcing. Thank you, Ashok, for energizing me. Ashok’s letter to me is reproduced below: 

LinkedIn Groups


Douglas,

Welcome to the Group! TNNWC Group's mission looks pretty interesting and closer to the interests/alignments of the group! Hope together we can help some startups in the region.

What do you think of the current petition with SEC about the exemption for "crowdfunding" kind of capital raise - up to a certain limit, without the Blue Sky laws etc.?

Don't you think the regulatory picture might slowly evolve to accommodate the growing interest in the CrowdFunding?

Just curious about what you and other members think. By the way, I created a poll for this, about when you think, if any, CrowdFunding would change the way startups raise capital. Could you care to answer that poll and, may be forward to other contacts? It should be interesting for us all to measure objectively the perceptions of the society around - eventually, those pave the way for how regulation evolves.

Thanks!
Ashok
Posted by Ashok Margam

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Crowdfunding is a rapidly-emerging phenomenon based upon the leveraging of the Internet and social media to solicit funds for projects, causes and for smaller companies (or start-up enterprises). It is a logical and innovative entrepreneurial response to the growing problem of obtaining relatively small amounts of financing for private enterprises. The principle is similar to that which is employed by not-for-profit, cause-based organizations which raise small contributions from a relatively large donor audience via their mass e-mailings, newsletter and their presence on the web.

At present, most crowdfunding efforts yield relatively small sums of capital (i.e., anywhere from US$5,000.00 to US$1,000,000.00) in very small increments (i.e., anywhere from US$100.00 to US$5,000.00) from any number of investors or patrons. It is, if properly planned and implemented, a means for an ambitious company to raise a small early-stage round of financing without having to: 1) approach and engage in an elaborate and often time-consuming courtship (sales cycle) with angel investors, venture capitalists, investment bankers, government agencies or commercial banks; 2) spend large sums of money -- principally legal fees, compliance fees and production costs) on preparing Private Placement Memoranda (for private offerings to a limited number of specially qualified, “accredited” investors) or Sales Prospectuses (for initial public offerings); or 3) sacrifice a tremendous share of the company’s ownership and control to outside parties at an early, vulnerable stage in the company’s life cycle.

Most participating investors in crowdfunding efforts are non-wealthy, non-institutional individuals who simply believe in the management, objectives or intentions of the offering entity. Many of them are, in fact, entrepreneurial individuals who would like to participate in other entrepreneurial companies for either altruistic reasons, or to obtain a direct return on investment from a private company, assuming that the company is successful.

It is a very straightforward approach which allows adventurous private sector investors or participants an opportunity to directly participate in the bootstrapping and profitability of potentially successful ventures. There are virtually no price barriers to entry (small sums are invested per participant), catastrophic risks (while there are risks inherent in every investment, if the amount being invested is less than the cost of dinner and a show, a loss of the entire investment would probably not have significant adverse consequences to the investor.     

The mechanism is incredibly simple. An entrepreneur, executive or spokesperson of an emerging enterprise or growing business makes an offer (generally in the form of a brief   request or polite solicitation followed by some additional information to those parties who indicate that they may be interested in participating) to the public through postings on various social media groups, opt-in subscriber lists, business networks, blogs, websites and other internet-based communications forums to raise money for some specified purpose. If the purpose is to raise funds specifically for investment in the issuing entity, and if the investor is not involved in the management or affairs of the company, one potential complication might be the need for compliance with federal regulations and state laws governing offerings of securities. If you are, in fact, making an offering of securities, you must make the necessary regulatory and state (“Blue Sky”) filings.

While I have heard numerous offline discussions about the SEC and other similar regulatory agencies in other countries regarding the possibility of creating a separate, less cumbersome status for crowdfunding offerings, and about numerous petitions to three of these agencies toward that noble effort, I remain highly skeptical that any significant change in the securities laws governing crowdfunding will come soon. Both the regulatory agencies and the expert securities lawyers have too much financially and politically at stake to create an exemption or exception for any “special” class of securities offering – especially one which I believe is going to increase tremendously in popularity within the next 24 months to the extent that it could become a capital markets game-changer.

It has long been the position of securities regulators that their primary role was to keep “order” in the capital markets (note: to some cynical folks that merely means keeping Wall Street investing as close as possible to casino gambling for the large numbers of small, independent investors, while simultaneously keeping the select, elite “too big to fail” powerhouses effectively in charge of the game, as the “house’s favored insiders”… but I digress…), and to protect investors from abuse and fraud – like the occasional Enron, Madoff or market collapse which vaporized many a pension and retirement fund.

For the time being, it would seem prudent to avoid using any method of crowdfunding that could be construed as a securities offering. The mere compliance and filing fees involved would make a small capital raise far too expensive for serious consideration. You should consult competent legal counsel to find out A) if you are making a securities offering, and B) what your most viable alternatives to this might be.

One way to determine whether or not you are making an offer of securities and may be subject to the applicable regulations and laws, at least in the United States is by the Howey Test.

The Howey Test says that a transaction constitutes an investment contract (therefore a security) if there is (1) an exchange of money (2) with an expectation of profits arising (3) from a common enterprise (4) which depends solely on the efforts of a promoter or third party. Clearly, under this standard, any crowd sourcing arrangement in which people are asked to contribute money in exchange for potential profits based on the work of others would be considered a security. As such, the applicable investment contract would have to be registered with a regulatory agency (such as the S.E.C.) unless it qualified for one of several rule-laden exemptions (e.g. Regulation A or Rule 506 of Regulation D of the Securities Act of 1933, or the California Limited Offering Exemption - Rule 1001 (also known as S.E.C. Rule 1001)). The penalties for a securities violation can vary greatly and depend in large part on the amount of profit obtained by the "promoter," the damage done to the investors, and whether a violation is a first time offense. However, a violation may result in both civil and criminal penalties, a return of any profit made and sometimes a lifetime ban from work in the securities industry. According to Section 5 of the Securities Act, it is illegal to sell any security unless such a sale is accompanied or preceded by a prospectus that meets the requirements of the Securities Act. You will have to check with an expert in the jurisdiction in which you reside, and in any jurisdiction in which your prospective offerees may reside, as well.


While I cannot and do not recommend or guarantee the efficacy or legality of any particular approach to any crowdfunding venture, I will state definitively that the structure of what is offered, and the way in which the marketing is conducted are two very critical components essential to getting the optimal crowdfunding advantage with the minimum likelihood of being in the position as an offeror or promoter of any type of securities.

I predict that some of the more spirited entrepreneurs and other innovative financial engineers looking into using the crowdsourcing approach will be delving into the following types of possible workarounds, although I do not express an opinion or offer advice on the viability or legality any one of them. I can, however, safely forecast, as a Futurist, that the following approaches or variations on them will be tried by requesters of crowdsourced capital. In each case, depending upon the specific nature of the structure of a transaction, there can be tax consequences (for example, where the “contributions” will be treated as taxable income to the company receiving them). Get advice from competent tax counsel prior to finalizing the details of any crowdfunding campaign:

1.  ADVERTISING AND PROMOTION - Offering contributors permanent ads, promotional spots, or endorsements in exchange for contributions of funds. In these cases, any stake in the company would merely be given to the contributors as a perquisite;

2.  HONORING EARLY ADOPTERS – Similar to the above approach, contributors would be honored as “early adopters” or “charter members” in special postings on the company’s website, newsletters and other applicable e-media. In these cases, any stake in the company would merely be given to the contributors as a perquisite;

3.  SPECIFIC PROJECT FUNDS – In this approach, the company would create a special fundraising campaign (with a segregated account for received proceeds) with contributions for a specific purpose, such as contributions to a charity, a community development project, an educational opportunity, or something of humanitarian or civic interest. In these cases, any stake in the company would merely be given to the contributors as a perquisite. An important issue here is the judicious application of the funds collected; the bulk of funds collected must be allocated for the specific purpose set forth in the project description or campaign plan, with minimal expenses deducted for company purposes;

4.  CLUB-TYPE MEMBERSHIPS – In this approach, contributors would be given certain privileges or access to resources of value (like club memberships) in exchange for their contributions. In these cases, any stake in the company would be given to these “charter members” as a perquisite;

5.  A COOPERATIVE OR COLLABORATIVE CO-VENTURE – In this approach, contributors would be actively rendering services to the company, or through the company, in consideration of their contributions, and each of these contributors would have some significant element of “say” in the company’s financial and business affairs. In effect, the contributors would each and all be acting as the co-founders of the company, or could be regarded as such;

6.  AN EMPLOYEE OWNERSHIP PROGRAM – In this approach, employees would be issued options (as bonuses) to purchase stakes in the company (generally at some bargain price) which they could earn and vest as a function of performance and/or seniority. These options might be considered and treated for taxation purposes as employee income, so due consideration must be exercised in how they are earned, issued, priced and exercised;

7.  BARTER – In this approach, the company might issue ownership stakes in lieu of cash payments to creditors, vendors and suppliers. Once again, seek professional advice on the tax consequences, if any, to both the company and to the recipients in this type of trade so as not to be unpleasantly surprised.

There will certainly be pioneers, who, at great risk to themselves (and others) will just go out and directly or indirectly sell stakes to large numbers of small-ticket investors via the Internet and social media. While this approach is certainly straightforward, with honest and honorable intentions, a significant volume of successes, especially involving larger amounts raised, will invite regulatory oversight and numerous legal “test cases” and arguments as to the legality of this type of fundraising. It may well force some changes in securities regulations and laws – but these types of changes generally take time and involve a number of legal and regulatory actions.

Expect to hear and see a great deal more about crowdfunding during the next two years as it becomes much more widely-known through increased experimentation and some newsworthy entrepreneurial successes.

Faithfully,

Douglas Castle
http://www.DouglasCastleBlogosphere.com

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ADDENDUM: What You'll Need To Know, And What You'll Need To Do, In Order To Succeed In Your CrowdFunding Project. Be Prepared.


And now, a continuation to the above article, with some important information for those Members of TNNWC Group (Note: membership is free, and it comes with some substantial benefits). To become a Member and join TNNWC, simply click on http://www.tnnwc.com/ and look for the "JOIN US" signs) who may wish to take advantage of Crowd Funding in order to jump-start their enterprises.

The issues to discussed here are for those TNNWC Members, or soon-to-be Members with a serious interest in Crowd Funding as a capital solution. It is written in a very simple, generalized Question and Answer format. This information is for the purposes of illustration only, and does not constitute investment, financial, accounting, tax or legal advice. If you are interested in having TNNWC assist you in the process, click on the button which is embedded below, and be sure to enter "CROWDFUNDING" in the field for for the Subject or the Service that you are interested in learning more about. If the button does not work immediately (it is allowed a fifteen-minute break twice daily, in accordance with union specifications), just jump ahead to the "Assistance" Section.

I'D LIKE MORE INFO ON THIS SERVICE!
[Click for instant assistance]

Assistance: If you are reading this article in a .pdf or other format where the above button doesn't work, simply either click on or copy and paste the url address below into your browser:
https://ciof.wufoo.com/forms/id-like-more-information-on-a-service/ , and you'll immediately have access to the form. We're sorry for the inconvenience.

Q: How much money should I be looking to raise?
A: Generally, from $5,000 US to $150,000 US. The "comfort zone" is between $5,000 US and $25,000 US.

Q: What is the smallest amount that a particpant should be permitted to contribute?
A: You may set the minimum or maximum as high or low as you'd like, but the increments should be established in this way: 

$10.00...$25.00...$50.00...$100.00...$250.00...$500.00...$1,000.00....$2,500.00 and $5,000.00.

Q: What should I be prepared to offer in return?
A: You should be prepared to offer each participant 1) a permanent ad as a "Sponsoring Founder" in proportion to the size of his/ her/ or its participation (for example, a $1,000.00 participant would receive an ad which was ten times the size of a $100.00 participant), plus 2) a free ownership in your entity (as evidenced by a simple certificate or memorandum) in the total amount (regardless of what you believe your company's value should be) of  between 5% to 10%. This equity should be given out in proportion with the participants' respective contribution amounts, in the same manner as you would apportion ad size as discussed earlier.

Q: What information do I need to offer about my company and the CrowdFunding project?
A: A brief synopsis of: 1) the proceeds required (your fundraising goal), and the smallest and largest individual participation permitted in dollar amounts; 2) the general application of the proceeds; 3) an Executive Summary Of Business (usually in the form of a downloadable .pdf file and generally not comprised of more than 3 pages in total); 4) what you are offering to participants in return; and 5) how long the offer will be open [my personal preference is for 60 to 90 days, with an option to extend the deadline further in your discretion]. The total text of your synopsis should never exceed three to five paragraphs (excluding any .pdf downloads).

Q: Where do I place and publicize my offer?
A: To your email list, to all of the social media groups (as applicable) to which you belong, on your blog or website (as well as on the blogs and websites of others), in the internet classified ads -- everywhere legally, socially and ethically available to you. Videos and podcasts may also be very helpful, as are news releases.

Q: How do I collect these proceeds?
A: I would suggest that you utilize a PayPal button which provides for contributions to go directly into your company's account. Do not accept cash contributions or checks via mail or courier service. Keep complete records of each participant's amount contributed, name, address and other pertinent information in your company's permanent records. You should report a tally of how well your campaign is doing periodically.

Q: Does TNNWC offer help to entrepreneurial start-ups and young, emerging enterprises with the CrowdFunding process?
A: Yes, as do other organizations. With TNNWC, your company will be the offeror, and our experts will help prepare all of the "show and tell" materials for your use as they guide you through the entire process. For further information, here's the button, and the "Assistance" cue:

I'D LIKE MORE INFO ON THIS SERVICE!
[Click for instant assistance]

Assistance: If you are reading this article in a .pdf or other format where the above button doesn't work, simply either click on or copy and paste the url address below into your browser:
https://ciof.wufoo.com/forms/id-like-more-information-on-a-service/ , and you'll immediately have access to the form. We're sorry for the inconvenience.

I wish you the best of luck in your CrowdFunding campaigns, and please advise TNNWC Group if they may be of service to you.

Now it's time to take action!

Faithfully,

Douglas Castle



*For a download of the entire original article (December, 2010), click on http://bit.ly/CrowdFundingWP

*For a download of this re-published and updated article (February, 2011), click on
http://bit.ly/CrowdFundingWP2  



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1 comment:

Crowd Sourcing said...

Hi,

Thank you for your post it is nice blog. You have defined the good use of Crwod Funding, it is collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. You can also share your ideas on this Crowd Funding

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