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Business Law

Crowdfunding – the Loonie Train gone Viral

Mar 14th, 2013

Part 1 of a Series on Crowdfunding

Did your school ever have a "loonie train" fundraiser? Have you ever considered raising money for your business in the same way?

 Cue, Crowdfunding.

 Since coming across the Torch Biking Helmet on the funding platform Kickstarter, I have been following the crowdfunding concept and exploring its possibilities for businesses.

 Allow me to explain:

 The concept of crowdfunding is simple and nothing novel - many "small" contributions at the individual level amount to large sums of capital. For example, the Torch biking helmet was funded by 641 backers who together contributed a total of $68,170.

[caption id="attachment_588" align="aligncenter" width="300"]The Inspiration The Inspiration[/caption]

 With the creation of websites for crowdfunding, large audiences with liquid capital (albeit each in small amounts) are accessible to entrepreneurs at minimal transaction costs.

 For the last few years three dominant forms of crowdfunding have emerged:

(1) Consumer lending;

(2) Reward based; and

(3) Donation based.

 Consumer lending is the largest category and occurs when lenders lend small amounts (at relatively high interest rates) to consumers with poor credit histories over the internet.

 Reward crowdfunding is when a reward is used as an incentive for support in a specific project. For example, the first 200 contributors of $100 or more to the Torch Biking Helmet received a limited edition helmet, a company history leaflet and promise of regular development updates.

 Donation crowdfunding is when funders contribute to a specific cause, individual or charity. This includes funding artists for the sake of contributing to their cause or traditional charitable causes like Ski For the Children’s which uses the internet instead of traditional funding methods.

 A fourth, and new form of crowdfunding has begun to take shape - equity crowdfunding. Equity crowdfunding is when capital stock in a company is issued and sold in small quantity to large numbers of people through the Internet.

Update: Click here for the next post which highlights equity crowdfunding.

 Spiegel Sohmer will be sponsoring CrowdFund Night on March 21, 2013. For more information on this event click here.

Seth B. Abbey, a corporate lawyer at Spiegel Sohmer, is available to answer your questions about this and other topics.


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