April 27, 2012 12:00:00 am

Crowd funding can help raise cash: Here’s how

By Carl Kalin

Crowd funding describes the collective cooperation and trust by people who network and pool their money together, often via the Internet, to support efforts of other people, causes or organizations. Crowd funding occurs for any variety of purposes such as disaster relief, citizen journalism, artists seeking support from fans, political campaign funding, funding a song or movie production, or funding a startup company or small business.

What crowd funding is available for raising money today? Websites such as Kickstarter.com allow people to raise money for “projects” today by soliciting donations from the general public. Kickstarter defines a project as something with a start and end, which excludes a business per se but does include items such as producing a song or video.

The public can use credit cards to make their donations online, and when the minimum amount required to fund the project is received, the person soliciting gets the money via Amazon payments. Note that a donation is not a sale, so it is tax free and does not buy any shares or equity in the project or entity being funded.

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Kickstarter funds most projects in the $5,000 to $10,000 range, although some have been more than $100,000. One of the things that makes Kickstarter popular is that it’s free to use unless you are successful raising money for your project — and then the fee is 5 percent. It’s also very easy to use and post a project online with a story and a video.

That works for small projects, but what about funding a business in Colorado?

A program in Colorado called SCOR (Small Company Offering Registration) enables a company to raise up to $1 million by selling securities to Colorado residents. The securities can be advertised to the general public, and anyone can purchase them as long as they reside in Colorado.

Unlike Kickstarter.com, there are a number of significant barriers to entry for a company doing a SCOR program which could also be posted on the Internet for general solicitation in a manner similar to crowd funding. One barrier is that the company offering must be approved by the Colorado Division of Securities under DORA, the state Department of Regulatory Agencies.

This requires filling out a very long and complex U-7 application that is submitted for approval. Once submitted, there is no guarantee that it will be approved, and there may be significant legal fees to engage this process. It could easily cost $30,000 in legal and accounting fees to get approved.

Once approved, there is no guarantee that the company will be successful in selling the securities, and a minimum must be raised before any money can be disbursed to the soliciting company. If the minimum is not met in a given time period, then all monies raised must be returned to the investors.

The bottom line is that this is very complicated, costly and risky for the company raising the money. As a result, it is infrequently used by companies raising money.

What is all the buzz about the new crowd funding with the JOBS Act? The JOBS (Jumpstart Our Business Startups) Act signed by President Obama on April 5 will enable national crowd funding to take place as soon as 2013 or earlier. Companies will be able to raise up to $1 million, advertise on the Internet and take money from the public regardless of an investor’s net worth or income. The cost of this process is expected to be much less than anything else available today.

Isn’t it a risky long shot to gamble on startup businesses? Yes, startup companies are very risky, but they attract investors because they offer high returns when successful. Americans spend $100 billion each year on legalized gambling, and while it’s fun to go to Las Vegas, it can also be fun and profitable to invest in a startup company such as Google or a local Colorado microbrewery. In addition to high-tech startup companies, crowd funding could be an excellent vehicle for growing a microbrewery, restaurant or other established business which has a following including people. These investors would invest $500 or $1,000 for shares with potential to go up handsomely while giving them ownership in something they can relate to and be proud to have in their community.

Carl Kalin is a crowd-funding adviser who offers seminars on how to raise money for entrepreneurs and small businesses. He has participated with five companies that raised more than $25 million in private placements. He can be reached at Carl.Kalin@gmail.com.