Raising funds is one of the top priorities for nearly every startup in existence, regardless of whether they have a working product or not. Crowdfunding portals can soon be used by startups to sell shares to investors, rather than using the traditional reward option such as on Kickstarter and Indiegogo.
As of next Monday, small businesses and startups will be able to wield the power of crowdfunding platforms to raise up to US$1m in funding. Rather than offering physical or digital merchandise in return, these companies can now attract mainstream investors over a twelve-month period.
However, there is no guarantee this move will attract a lot of investors in the first few months.A new process is always facing mental hurdles before being embraced in full, especially considering this new option is rather complex and involves higher costs. Moreover, investors and startups will need to work with disclosure requirements, which may put off a lot of people.
As one would come to expect, the government is keeping a close eye on this new situation, as the fundraising can only take place through registered broker-dealers and regulator-approved funding portals. Five portal applications have been approved, and four have been withdrawn already. In the end, it will be impossible to say whether or not this can become a success.
Securities offerings are treacherous waters for existing crowdfunding platforms, and Kickstarter is the first one to say they will not expand into this new line of offerings. However, there are certain appeals to this concept, as anyone can become an investor, which also helps to build company-consumer relationships at an early stage.
One thing that will make this solution succeed or fail are the fees associated with these securities offerings. Fees can vary anywhere from 5% to 10% whereas some platforms may also take equity in the company itself when listing their campaign. This will not be a cheap solution for either investor or issues; that much is certain.
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