Summer 2013
Crowd-funding 101 By Mark Battersby

Crowd-funding Platforms

These are for privately held companies from registered new ventures and startups to established small-middle sized companies. offers equity in exchange for capital investment Among the oldest and first to get into JOBs Act crowd-funding equity crowd-funding, mainly for startups another that is mainly for startups More generalized equity crowd-funding for smaller businesses

Traditional sources of credit are still hard to come by but gift shop retailers like you can explore new sources of revenue, like crowd-funding, to expand your business.

It’s been a year since Congress launched the Jumpstart Our Businesses Startups Act otherwise known as the “JOBS Act.” Crowd-funding is challenging venture capital and angel funding as an alternative source of financing for not only startups, but also for many small gift shops and businesses.

Crowd-funding began with the concept of small enterprises engaging in online capital-raising through social media, and raising funds from the general public.

What is crowd-funding

social-media-cubeApplying for a loan can often be a daunting and unrewarding task, but modern technology is providing an alternative. Crowd-funding allows those seeking money to post details of their project online and, hopefully, donations come flowing in. Until recently, however, entrepreneurs in the U.S. were largely limited to trading charity donations, movie tickets, T-shirts, and similar items for informal financing through social media. Today, by working with websites, called “funding portals,” those needing funds can reach out directly to investors.

Although large-scale crowd-funding was not previously permitted under federal securities regulations, today investors can receive equity (i.e. a “share” of ownership in the business), or bonds (i.e. providing a small loan to the business) depending on what the retail gift business chooses to offer.

Regulations, we have regulations

With some restrictions, small gift retailers and businesses can raise up to $1 million from small-time investors through crowd-funding.

The JOBS Act’s crowd-funding provision allows gift businesses to use online resources to solicit investments from individuals without having to register their shares with the SEC -– as long they raise less than $1 million a year.

Unfortunately, crowd-funding regulations don’t allow gift retailers or anyone else to promote and sell securities through their own websites. The new legislation requires solicitation of prospective investors only through approved “funding portals,” which will have to comply with upcoming SEC regulations.

Funding portals serve as an administrative service for processing securities purchase transaction, and the dissemination of information. However, gift retailers may be disappointed when they realize that their offering will essentially compete against all other companies that the portal represents. Currently, portals cannot actively recommend specific investments such as yours.

Telling tales and costs

For offerings of less than $100,000 in a 12-month period, gift businesses are only obligated to provide financial statements prepared in-house. For offerings between $100,000 and $500,000 in a 12-month period, companies are obligated to produce financial statements that have been “reviewed” by an outside accounting firm. And for offerings greater than $500,000 in a 12-month period, companies are obligated to provide audited financial statements.

Restrictions regarding fees and how much an intermediary may charge an issuer or investor in connection with a transaction were not specified. The JOBS Act is however, , pretty emphatic that intermediaries and their directors, officers or partners cannot have a financial interest in an issuer using its services, presumably precluding taking stock in return for providing the service. Intermediaries also may not compensate promoters, finders, or lead generators for providing them with the personal identifying information of any potential investor. Other restrictions regarding disclosures, risk, cancellation and protection of privacy have been set in place to protect investors and reduce the risk of fraud with these transactions. It is expected that these restrictions will be further clarified as the SEC adopts the needed regulations.

Taxing taxes

With crowd-funding, investors can contribute only small amounts (i.e., $50), or make more substantial contributions (e.g., $2,000). While a new law defines the legal monetary limits for investors, the IRS has yet to weigh in on the tax angle. Will the contributions be a “gift” rather than “income” to the retail gift business? If the business provides a service or product in return for the contribution as many due, will it be considered “income?”

If the contribution is significant, it couldn’t be classified as a gift and probably not as income, but is it then a loan or equity capital? If it is equity, does that mean the investor is now a partner or shareholder? For those operating their retail gift business as a pass-through entity such as a partnership, LLC, or S corporation, if the contribution is equity capital, the operation may be required to send the individual investor a K-1 statement each year. Taxes may be considered a minor problem if the gifts operation is getting several large (e.g., $10,000) contributions. On the other hand, it is anything but minor for those receiving 100 small contributions that may now have to be treated as equity investments.

Obviously, professional guidance and advice is a necessity for every gift retailer, business owner, operator, professional and entrepreneur considering crowd-funding.

Despite signs that credit constraints are finally beginning to ease there’s clearly an appetite for exploring unconventional alternatives such as crowd-funding. Crowd-funding is replacing more formal and traditional fundraising techniques with a more casual, yet powerful, approach based on crowd participation. Will you take advantage of crowd funding the next time your gift shop needs capital funding or a unique project or event needs financing?

Mark Battersby

Battersby is a freelance writer with offices in the suburban Philadelphia community of Ardmore, PA. For more than 25 years, his tax and financial features and columns have appeared in leading trade journals, magazines and newsletters. He has authored four books.

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