Recent Developments in the World of Crowdfunding

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Recent Developments in the World of Crowdfunding

As crowdfunding gains traction as a financing source for entrepreneurs a couple of recent developments are worth noting. Both of these are sure signs that crowdfunding is now nearing mainstream acceptance as a viable and sustainable financing mechanism.

First, the State of Indiana has issued regulations that now permit Hoosier residents to invest up to $5,000 in Indiana start-ups or active businesses in search of capital. Following enabling legislation passed by the General Assembly, Indiana Secretary of State Connie Lawson was charged with developing rules that outlined permissible transactions. Secretary Lawson issued final rules in July of this year that now permit qualifying investors and transactions to be exempt from “Accredited Investor” requirements formerly administered and enforced by the U.S. Securities Exchange Commission. Indiana is now one of a handful of states that has passed legislation and written rules to open investment activities to individuals other than accredited investors.

In general terms, this expansion of crowdfunding possibilities in Indiana rests on several key requirements. These include:

  • Investors and capital-raising entities must be domiciled in Indiana
  • The total capital raise may not exceed $2 million
  • 80% or more of the business’s assets and revenues must be derived in Indiana
  • 80% or more of the crowdfunding proceeds must be deployed in Indiana
  • Entities raising capital through crowdfunding are required to 1)make formal disclosures outlining the purpose of the capital raise, 2) establish an escrow account for funding proceeds, and, 3) conduct crowdfunding operations through a Secretary of State-approved “Internet Provider”

Additional information about this development and detailed rules can be found on Secretary Lawson’s website.

While moves like those here in Indiana to broaden the scope of crowdfunding have taken root another development highlights the maturation of the crowdfunding process. In a recent article posted on CNBC.com’s website Amateur hour on Kickstarter is over author Alex Daly notes that having an arresting idea or business model is no longer a guarantee for meeting a funding goal. Rather, crowdfunders must now also compete aggressively and creatively with other entrepreneurs for the attention of potential financiers. He notes that sophisticated and professional digital media presentations are becoming the norm for successful capital raises.

Among specific recommendations made by the author to stand out from the crowd:

  • Hire a professional to shoot your video. No more smartphone audio and video.
  • Make your video relevant. Stay on message as to what you will do with the money and have the video show with props and examples what you are proposing.
  • Be original. No looking into the camera to tell your story.
  • Increase your video’s potential to go viral. Think about who else might be interested in your pitch other than potential financiers.
  • Create a professional project page using high resolution video and graphics.
  • Use a consistent visual style employing color, graphics, photo style and video. This is the beginning of your brand development process.

Readers wanting to learn more about each of these recommendations can search on CNBC’s website using the article name or Alex Daly at the CNBC Tech Crowd Council.

These two developments attest to the fact that crowdfunding has been legitimized and that the game is being played with a different rulebook than the one from just a few years ago. While the base of investors may have broadened in Indiana the bar keeps being raised to grab their attention. No doubt this game is still in its early innings and more innovation and competition can be expected on both sides of the fundraising process.

Gary Brownlee

Gary is a Business Advisor for the NW-ISBDC. He works primarily in Porter County. He holds a BA in Economics and MBA in Finance, both from the University of Pittsburgh, and is a graduate of the Stonier Graduate School of Banking at Rutgers University. His responsibilities include, assisting clients in business planning and execution, working with small businesses to secure financing for start-up and growth, and connecting small businesses to key resources. Gary has over 30 years of business experience in the financial services industry including business planning, credit/risk management and financial analysis. Prior to co-founding a specialty finance business, he served as a senior officer of Indiana Federal Bank where he represented the bank on the board of the Valparaiso Community Corporation. He has served as a board member of the University of Pittsburgh Alumni Association for the past decade and currently holds the position of Treasurer.
Gary Brownlee can be reached at gbrownlee@isbdc.org.
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