What is crowdfunding?
This is a way of financing a business when people and non-financial organizations invest money in a company through special platforms on the Internet. In return, they receive shares or bonds of the company.
Online platforms through which money is collected are called investment platforms. They help entrepreneurs prepare an offer for investors, issue securities, receive funds for a project, and remotely conclude an agreement with those who intend to invest in their business.
This way of financing is not suitable for any organization – the time of its existence, turnover, and investment attractiveness are important here. As a rule, the site has analysts who carefully study the company’s documents (financial and management statements), evaluate its prospects and decide whether to allow it to raise funds.
And yet, crowdfunding platforms do not have such stringent requirements for companies as banks. Financing can be obtained even by those enterprises that do not yet have a credit history or whose business plan seems insufficiently convincing to banks.
Crowdinvesting is one of the types of crowdfunding, that is, collective financing through investment platforms. Crowdinvesting can be useful when you are planning to start a new project or grow your business. With this financing option, you offer investors your securities – stocks or bonds.
Stocks: Buyers of shares will become co-owners of your company, will take risks and receive profits on an equal basis with you.
Bonds: Bonds are basically your IOUs. They confirm that you will return the investors their money at the time the bonds are redeemed, and in addition to this, you will pay them coupon income – interest on the use of their investments. At the same time, investors do not receive rights to your business.
You can borrow money from investors without issuing bonds. If your business is stable and you just need to close the cash gap, replenish working capital, and purchase goods or equipment, crowdlending may be more suitable for you . In this case, through the online platform, you can borrow money from investors at interest for several months or weeks.
And for creative and social projects, there is crowdfunding with non-financial rewards . It assumes that investors will not receive dividends from investments in your business and not interest on loans, but your product or service.
Who can use crowdfunding?
Almost any project with growth prospects has a chance to raise money through investment platforms. But usually online platforms allow businesses to raise funds that:
- officially registered as a legal entity;
- exists for at least a year;
- has a significant turnover on the account (if the turnover exceeds 50–60 million per year, then the chances of obtaining financing will be higher);
- investment attractive, it has the potential and strategy for increasing turnover (is this true, analysts of the site will evaluate it);
- business owners have a good credit history, they did not participate in gray schemes.
Investment platforms often help even very young businesses with small turnovers, but in this case, entrepreneurs should have a clear development strategy and a clear business plan.
How to get money through an online platform?
First you need to choose an investment platform. You can only consider sites that are included in the register of the Local Bank and, therefore, operate legally. In order not to run into scammers, you need to carefully check with the registry not only the name, but also the address of the platform’s website.
Also, be sure to find out:
- How long has this site been operating?
- how many projects were able to raise money on it;
- how many companies are crowdfunding right now;
- how those who have already worked with it speak about the platform.
Find out the terms of cooperation with the site, in particular the number of commissions for collecting money. Carefully study the standard contracts that it offers to entrepreneurs and investors. If necessary, consult with a lawyer.
After you decide on an intermediary, start collecting money. Each site has its own rules, but the stages will be common to all.
- Register on the crowd investing site . Fill out an application, provide information about the company and its activities. As a rule, if you pass the pre-selection, you are assigned a personal manager. You will discuss the project with him in detail. For example, he may ask to send the company’s financial and management reports.
- Wait for the consideration of the application and sign an agreement with the site .
- Fill out the company profile on the platform website, and also write an investment memorandum – a document that should detail the strategy, business plan, and risks. Most often, the site manager prepares the memorandum with you.
- Issue securities. Often the platform itself helps in this.
- Make an investment proposal . In it, you will write how long the fundraising will take, what minimum and maximum amount you want to accumulate, and what investors will receive. In the case of a share issue, entrepreneurs often include their plans to pay dividends in the offer.
- Start fundraising. Do not be lazy to communicate with investors, answer their questions and share company news. As a rule, this can be done directly through the site. Investors’ money will go to the so-called nominal account, which the platform opens with a bank. But you will receive them only if the conditions of the investment offer are met and you manage to raise the required minimum within the period you set.
- If you do not pass the lower threshold, the platform will declare the crowdfunding failed and you will not receive any money. As soon as the upper limit of the required amount is reached, the fundraising will stop.
- Get funding. If crowd investing is successful, the site will send the collected money to your account and automatically draw up your agreement with investors.
How to raise money with crowdfunding?
The whole process of crowdfunding can be broken down into several steps.
Step 1. Formulate the purpose of your project
Do you want to launch a social project, launch an innovative product, or expand an existing business? Depending on the goal, you will be able to determine which type of crowdfunding is best for you.
Step 2. Choose a way to finance the project
If your business is already doing well and you urgently need money for a short time, then crowdlending will suit you. People and other companies will be able to lend you money for a couple of years or even a couple of months.
If you are planning to start a new business project or develop your business and want to attract professional investors, you should pay attention to crowdinvesting . In this case, investors can invest in the business in exchange for the securities of your company.
Perhaps you produce goods or services that are in high demand. For example, you have a metal rolling shop or a nail salon. Or you dream of a creative project – you want to release a book or a music album. Then you can offer investors the result of your work: say, 10 tons of pipes, an annual certificate for hand care, or a copy of your publication.
Your obligations will be formalized as a sale of so-called utility digital rights (UDRs) . That is, the investor will receive a digital certificate that will allow him to demand from you some thing, work or service, intellectual product or rights to use it.
Step 3. Choose a site
Whichever of these methods you choose to finance your project, you will have to cooperate with an investment platform – an intermediary site where potential investors meet with someone who needs money. And in order not to run into scammers, you need to carefully evaluate your future partner.
First of all, you need to make sure that the investment platform is in the Register of your country Bank. Then you can be sure that the regulator ensures that the platform runs smoothly, complies with its obligations and guarantees the security of payments.
By law, all platforms that engage in crowdlending, crowdinvesting and crowdfunding with non-financial rewards must be included in the registry. This requirement does not apply only to charitable crowdfunding sites.
The registry contains the names of the platforms and – most importantly – the addresses of their sites. It is necessary to carefully check these addresses so as not to accidentally get on the page to scammers.
Also worth finding out:
- How long has this site been in existence?
- how many successful projects she has implemented;
- how many entrepreneurs are raising money right now;
- what are the reviews about it on the net.
If you can contact those who have already raised funds on this site, find out how they rate their experience with it.
Carefully study the contract that you are going to conclude with the site. If necessary, consult with a lawyer.
If in doubt, do not take risks, look for another intermediary to finance the project.
If the investment platform looks reliable, find out the terms of the partnership:
- what documents you need to provide to start the project;
- whether the site will help to draw up an investment proposal for potential investors;
- what percentage of the attracted money the site takes for its services;
- whether it will be necessary to pay a separate commission for transferring money to your bank account or is it included in the total commission percentage of the site.
Compare the conditions of several sites and choose the right one.
Step 4. Make an investment proposal
Conclude an agreement with the chosen investment platform. Register on it and create an account. Provide the platform with all necessary documents. Present the project on the site.
With the help of platform specialists, make an offer to investors. It should spell out all your obligations – for example, when and how much you promise to pay investors or what rights to grant them.
In addition, each investment proposal must include:
- the duration of the offer;
- the minimum amount that you would like to collect – if you fail to overcome this limit, the platform will declare the collection failed – and you will not receive anything;
- the maximum amount – as soon as it is reached, the fundraising will stop;
- conditions for the circulation and termination of digital rights – if you offer them, you must specify whether investors will be able to trade them on the platform and according to what rules, and in what cases the DRM will end.
Your obligations and rules for the validity of digital rights will be included in the investment agreement. The platform will automatically conclude it between you and those who will finance your business if you manage to raise the required amount.
Step 5. Start fundraising
Each platform has a so-called nominal account, to which it accepts transfers from investors. The law clearly regulates where the money from this account then goes:
- entrepreneurs who raise funding if the fundraising conditions are met;
- back to investors , including if they did not find suitable projects and changed their minds about investing;
- platform – but only the commission due to it.
Banks make sure that money from nominal accounts is spent exactly for its intended purpose.
Step 6. Settle with investors and pay taxes
Fulfill your agreement with investors: transfer them securities, digital rights or money. In the case of crowdlending, you will have to return the money to investors in the same way as you received it – through the nominal account of the investment platform.
If you sell digital rights, the money raised through crowdfunding is considered income – and you need to pay tax on it. Its amount and terms of payment depend on your taxation system.
When you borrow money from investors or they invest in your securities, you will not have to pay income tax.
Are crowdfunding fees taxable?
No. Funds that you manage to raise by crowd investing in your securities are not taxed.
What happens if the business idea does not materialize and there is no profit?
If you do not fulfill your obligations to investors (in fact, they act as creditors of your business), they can initiate bankruptcy proceedings for the enterprise. During this procedure, all his assets will be sold – the money received will be divided among all creditors. And if something remains after the payment of debts, then the rest will be distributed among the owners of the company.