Charities and the arts frequently use crowdfunding to raise money
Actor Zach Braff wanted to do a follow-up to his successful 2004 film “Garden State’’ and had the opportunity to take a traditional route in terms of funding. But he said that would have required some artistic compromises he did not want to make, so instead he turned to a crowdfunding site to finance his film.
On May 24, Braff announced that he had received pledges of over $3 million (and his target was only $2 million) from over 46,000 investors to go ahead and make his film “Wish I Was Here.”
Crowdfunding, a recently approved form of raising capital for small business concepts, is gathering steam among both investors and people looking for investors. Popular among artists and charities, it is a way for startups to raise money without giving up financial control of the company and popular among investors who want to have a hand in a pet project.
Kickstarter is the most successful crowdfunding site today (and the one that Braff used for his film).
Crowdfunding is sort of like a co-op for small investors. It was created by the JOBS (Jumpstart Our Business Startups) Act of 2012 signed into law by President Barack Obama, and it is regulated by the U.S. Securities and Exchange Commission.
Currently, crowdfunding investments are limited to $10,000 per unaccredited investor (or 10 percent of their prior year’s adjusted gross income if income is greater than $100,000). For investors with less than $100,000, the limit is 5 percent of adjusted gross income or $2,000. These limits appeal to both the investor (who has a limited stake and liability) and the solicitor, who is specifically interested in a funding platform that does not allow any one investor to become too involved financially.
For the solicitor, it must state an investment target over a short period of time (Braff’s film had an investment period of 30 days). If a crowdfunded project does not meet its target investment level in terms of pledges over a set period of time, no funds change hands and the project is cancelled, at least from a crowdfunding standpoint.
Investing via crowdfunding is risky; it is estimated that between 50 and 75 percent of startups fail. If the company fails, there will be no financial reward to the investor. Also, some crowdfunded projects can offer “shares’’ as reward for investment while others can only offer “rewards.”
For instance, the Zach Braff film offered tickets to screenings of the film, or autographed DVD copies of the earlier film “Garden State”’ as a reward for investing. Charities cannot offer any financial reward for investments.
But some startup companies can give shares of the new company to crowdfunding investors, and those shares can be sold by the investor after 12 months. Should the company have an initial success, or look like a strong firm, those shares could be valuable. But the possibility that the startup will eventually produce the kind of profit that will be returned to shareholders is small.
“I can’t imagine this will become an investment vehicle with attractive average returns,’’ said Harvard Business School Associate Professor Ramana Nanda.
Kent McDill is a staff writer for Millionaire Corner. McDill spent 30 years as a sports writer, working for United Press International and the Daily Herald of Arlington Heights, Ill. From 1988-1999, he covered the Chicago Bulls for the Daily Herald, traveling with them every day through the nine-month season. He also covered the Bulls for UPI from 1985-88, and currently covers the team for www.nba.com. He has written two books on the Bulls, including the new title “100 Things Bulls Fans Should Know And Do Before They Die’, published by Triumph Books. In August 2013, his new book “100 Things Bears Fans Should Know And Do Before They Die” gets published.
In 2008, he resigned from the Herald and became a freelance writer. The Herald hired him to write business features and speeches for the Daily Herald Business Conferences and Awards presentations.
McDill also writes a monthly parenting column for the Herald’s Suburban Parent magazine.
McDill is the father of four children, and an active fan of soccer, Jimmy Buffett and all things Disney.