By Drew Dixon
The Florida Times-Union, Jacksonville
WWR Article Summary (tl;dr) Crowdfunding a business and or project via kickstarter, indiegogo or a host of other popular sites is a great way to raise money for that next idea. There are however, pitfalls to launching a campaign. Community leaders in Jacksonville, Florida are hosting a workshop to highlight some of those risks.
Crowdfunding has become one of the go-to choices of funding for startup entrepreneurs who need some financial help getting their businesses off the ground. But that approach has become rife with potential conflicts about who has control and what investors are owed if a business succeeds.
JAX Chamber and the Jacksonville chapter of SCORE is hosting a workshop Monday to advise entrepreneurs on some of the potential concerns for startups seeking capital through crowdfunding sources. The workshop runs from 1 p.m. to 2:30 p.m. Monday at the JAX Chamber headquarters at 3 Independent Drive.
The workshop is free and Carlton Robinson, vice president of Entrepreneurial Growth for JAX Chamber, said 40 to 50 entrepreneurs have already registered. He said the chamber wanted to host a similar workshop a year ago, but there wasn’t enough interest to go through with the program.
But this year has brought new federal regulations for crowdfunding ventures, which are usually done on the internet where entrepreneurs ask for “investments” from potential supporters online.
“The biggest issue with crowdfunding is the regulation of it. There are different rules and what they will cover in this upcoming workshop are the new set of rules that went into effect in May this year,” Robinson said.
“These regulations allow smaller businesses and startup firms to actually acquire equity capital from what’s called a non-accredited investor,” Robinson said. “With the process of securing capital using this structure, the businesses really need to be educated. There are ownershi**ues, equity issues that could hamper a business owner going down the road.”
Crowdfunding has become a ubiquitous term in the startup culture. The One Spark festival held in April each year in downtown Jacksonville bills itself as the “world’s largest crowdfunding festival.” The fest is designed to be a celebration of startup businesses and entrepreneurs hatching new firms.
Crowdfunding itself is designed to pull in startup investments from as many people as possible to help get the business off the ground.
Traditionally, at least in recent years, websites such as Kickstarter.com has been a favorite of startup businesses where they solicit contributions from crowds of people, hence the “crowd” in crowdfunding.
But Craig Linksy with SCORE, which is a local nonprofit small business and educational advisory organization, said crowdfunding was generally pretty free of definitions and lacked any significant regulation until this year.
Kickstarter and similar websites will not fall under the new regulations, Linsky said. Rather, the new rules focus on crowdfunding efforts that are linked to promises of return on investments.
“Kickstarter and those kind of companies really are providing money to people who are soliciting to it with no strings attached,” Linsky said.
“Under equity crowdfunding, you actually become a shareholder in the company. That’s the new twist to it.
“There is consequences if you do successfully crowdfund [through equity crowdfunding] in that you now have a lot of investors, some may want to inject themselves into the management process,” Linsky said.
With more entrenched investors, Linksy said startup entrepreneurs have to decide how much control they will give their investors.
Kickstarter crowdfunding usually promises some sort of first access to a product or similar benefits to those who contribute to a startup if the business gains traction.
Linsky said the growing trend of crowdfunding is bringing more sophisticated investors who expect a financial return and consider themselves part of the actual venture.
“You set this up where the investors either have non-voting shares or some other version of equity such as preferred stock,” Linsky said.
“That limits their [crowdfunding investors] ability to actually, by their votes, influence the direction of the company.”
Linksy said many startup entrepreneurs are novice business managers and they simply aren’t aware of some of the pitfalls that may await them if their business takes off with the help of crowdfunding contributions.
“It’s all still relatively new,” Linksy said. “Under these equity crowdfunding regulations the people who do the investing are shareholders and they do have a stake in the company.”