Clearing Up Crowdfunding Confusion

Last month critics of crowdfunding jumped on their soap boxes after the sale of Oculus to Facebook. After the completion of the $2 billion acquisition was announced, social media began to buzz. Those that are opposed to the idea of crowdfunding took this opportunity to proclaim that those that had backed Oculus' Kickstarter campaign had somehow been swindled out of a financial windfall.  This could not be further from the truth.

Crowdfunding is not a simple concept. In fact. the term 'crowdfunding' has become an umbrella term for many different means for entrepreneurs to use in order to raise capital for their businesses.  The crowdfunding detractors mentioned above appear to be attempting to use this broad term to confuse the public to satisfy their own personal agenda. There is a vast difference between rewards-based crowdfunding and the sale of debt or equity in your company.

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Rewards-based crowdfunding has become very popular over the past few years. These are the platforms where the general public can explore the various ideas and concepts of others. If they like the what they see they can choose to back that business. When you back a business you receive something in return. These can vary from a thank you letter to a promotional item to an opportunity to receive the product before its available to the public.  In the case with Oculus, well over half the backers donated $300 each and received a developer kit that allowed them to develop software for the headset.

These types of "rewards" should not be confused with the debt or equity investments that the new crowdfunding laws are meant to cover. Those that paid Oculus $300 and received the developer kit cannot convert that kit into Oculus stock. The same way that when you buy you morning coffee from Starbucks, you are not given the option after the purchase if you want that coffee or ownership in Starbucks. Reward-based crowdfunding is not regulated by any government entity because its actually viewed as a sale. You are paying a business money and in return you receive something.

The new crowdfunding laws, like the JOBS Act or the Michigan intrastate crowdfunding laws, are regulated by the government. When you purchase equity in a business, you do not receive a product. Instead you receive an ownership interest in that business.  When you loan money to a business, you execute a promissory note and receive interest on your investment.  If you give a business money and sign a profit sharing agreement, you get return based on how much revenue that business generates.

If Oculus had run a crowdfunding campaign under the JOBS Act and for every $300 you paid, you would get 1 share of Oculus stock, when Oculus sold for $2 billion, the over 5,000 backers that paid that money would have been paid for the value of 1 share of Oculus stock as a return.  Obviously, all those backers knew they were not getting any shares in exchange for their $300.

Crowdfunding is a new tool for businesses to utilize. It provides capital but it goes beyond that too. It can validate a product or business. It can provide exposure for a new business that is looking to make a name for itself. It is also an investment opportunity that will see hundreds, if not thousands, of people vetting the business, its owners and the market.  It would seem that if a business is able to reach its funding goals, not only does that legitimize the business concept but also means the business is credible too.

For more information on crowdfunding or other business funding issues, contact The Business Law Group by clicking HERE and letting us know what we can do for your business today.

Source: "Why Oculus Didn't Betray Backers With $2B Facebook Buyout" by Kendall Almerico of Entrepreneur