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Need Business Capital? Consider Crowdfunding

Need Business Capital? Consider Crowdfunding

In 2012, a new law (the Jumpstart Our Business Startups, or JOBS Act) made it possible for companies to ask family, friends and the general public–rather than just accredited investors–to help finance their businesses.

A good example: Star Citizen, a video game produced by Cloud Imperium Games (CIG), catapulted into the public eye by raising $2 million through Kickstarter, a well-known Internet-based crowdfunding company. CIG then went on to raise a total of more than $84 million from video game fans. Earlier this year, Hollywood producers raised $406,405 through the crowdfunding company Indiegogo to help finish Orson Welles’ final, incomplete film. Many companies have raised money for smaller projects, too.

While past crowdfunding efforts generally financed specific projects like games or movies, some firms are now using it to raise capital or even launch brand-new companies. It’s an approach we think has great deal potential for business owners.

Just what is crowdfunding?

As the term implies, crowdfunding involves asking a lot of people to contribute or invest money into a specific endeavor. You work with a crowdfunding platform to manage your “campaign.” This company accepts and processes contributions for you, and often helps market your project to potential investors.

This capital-raising method offers several advantages: There are no complicated Securities & Exchange Commission (SEC) filings. You’re not limited financially by what banks are willing to offer you. You don’t have to limited by the restrictions may be placed on your business by venture capitalists. You get to control exactly how much equity you allow your investors to obtain and retain control of your company.

As mentioned earlier, crowdfunding is also a very “democratic” way to raise capital. You can accept money from your neighbor, brother-in-law, or whoever you like—not just already vetted investors. And so far, crowdfunding appears to be a much cheaper way to finance your company compared to an Initial Public Offering (IPO). You pay a percentage-based fee to your crowdfunding company of choice, but it’s likely less than you would pay otherwise to bring in new funds.

Regulations are still unfolding

The federal government has been slow about implementing crowdfunding regulations. In the meantime, 22 states have passed local laws, and New Jersey’s standards have passed the Senate and are awaiting approval from the governor. There will likely be some different requirements depending on the state in which your company is located—for instance, whether or not you can accept out-of-state contributions/investments. New Jersey rules mirror federal guidelines, with total contributions for a company capped at $1 million. Individuals investing $5,000 or less can receive equity in exchange for their contributions.

Tax planning is a priority

Since this financing method is still fairly new, there are probably some kinks still to be worked out. However, based on the current guidelines it looks like the tax impact is: If crowdfunders give you money in return for some amount of equity in your business, their funds are considered investments or “capital contributions.” Their money remains on your company balance sheet as shareholder equity but isn’t considered taxable income.

On the other hand, if your crowdfunders donate money to a company project (without receiving equity), their contributions are taxable on your business return.

Small business owners should be excited by the new potential funding sources being created by crowdfunding regulations. Be sure to talk with your tax professional and Wealth Advisor about any future crowdfunding plans for your business or as an investor.

 

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Please note that RegentAtlantic does not provide tax advice. Please consult with a tax advisor of your choosing prior to implementing any of the strategies discussed in this article.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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