Investing“Crowdfunding is a new word that simply means collecting relatively small amounts of money from large numbers of people. The word may be new — but the phenomenon is not.”

In 1885, the pedestal for the Statue of Liberty was crowdfunded by contributions from the public through a campaign led by newspaper magnate William Randolph Hearst. In 1992, Jerry Brown, who is now the Governor of California, financed his run for President through contributions of $25 or less collected via a toll-free telephone number. And for a long time, schools, cultural institutions, aid organizations,
medical foundations, and other nonprofits have used TV pledge drives, mailings, and other methods for public fundraising.

In 2009, websites like Kickstarter (kickstarter.com) began giving people an easy way to collect funds online to support their own projects. Anyone could do this. You no longer had to be a large organization with the right kind of bank accounts and software systems running on your web server. This new, democratized form of fundraising, called crowdfunding, has quickly grown in popularity. Today, hundreds of crowdfunding websites based all over the world handle billions of dollars in combined transactions each year, to fund diverse ventures such as making movies, helping restaurants expand to new locations, manufacturing electronic devices, and setting up health clinics.

Current regulations only al low crowdfunding for donations although fundraisers typically promise rewards or “perks” to their donors: fund a movie and you’ll be thanked in the credits, for example, or fund a restaurant and you’re invited to the launch banquet. As crowdfunding grew and evolved, many advocates felt that there was a need for new laws to allow people to invest through crowdfunding. They would then have a financial reward for helping with the success of small businesses that they believed in. The idea proved popular — and a law permitting crowdfunded investments passed in 2012 as part of the federal JOBS Act. Meanwhile, more local-oriented versions of the law have passed in some states.

Small businesses in most parts of the U.S., at this time, cannot use crowdfunding to raise investments from the general public because the regulations are still being worked out. They are, however, expected to go live in the first half of 2014. Meanwhile, many other countries are considering or already have new laws to allow crowdfund investing, informed by the U.S. example. The World Bank recently published a report, “Crowdfunding’s Potential for the Developing World,” which argues that countries in the developing world might use crowdfunding to “leapfrog” the complex financial structures of more established economic power nations, and more efficiently foster entrepreneurship and grow their economies. Excerpts from the World Bank’s report follow this article.

Some people in the U.S. focus on how the new laws will allow people anywhere to invest in startups that could become big companies and yield huge profits — “the next Facebook,” as they say. Some crowdfunding advocates see more potential for these laws to help smallerscale local investing within communities. Immigrant communities in the U.S. already have excellent records for local entrepreneurship, thanks to their closeknit social ties and mentorship. Some believe that it is exactly these types of communities that can benefit most from the new investment laws. As the World Bank report suggests, immigrants in diaspora might contribute to crowdfunding efforts in their home countries for multiple reasons: to individually help with those efforts, to help their motherland as a whole, and to strengthen their ties to the home community.

A word of caution: Ethnic communities are also the most vulnerable to what regulators call “affinity fraud” — where a scammer plays on ethnic identity to take money from others by basically saying, “You can trust me because I’m one of you.” If a community seeks to foster internal entrepreneurship and grow its economic power through crowdfunding, it needs to be vigilant against fraud — and the community’s leaders and chambers of commerce must be the most suspicious and rigorous of all, to lead the way. The SEC has good information about affinity fraud at http://www.sec.gov/investor/pubs/affinity.htm.

If you might want to use crowdfunding to raise funds for a business, a cause, or a creative project, you should know that it isn’t easy. You can’t just ask for money online and expect it to roll in. The most successful crowdfunding campaigns show that you’re serious about the project, you’ve done a lot of work already, and you know exactly what you need to do next. They require humbly reaching out, one-ata-time, to friends, family, and potentiallyinterested people you know. They often also include a nice-looking video — so if you don’t know how to make a short video yourself, you should get help from someone who can.

You can find more good advice on how to run successful crowdfunding campaigns on Kickstarter, Indiegogo, Rockethub, and other leading crowdfunding websites. Crowdfunders based in ASEAN countries can raise money for projects using regional sites such as Malaysia’s pitchIN and SocialSharity, or Indonesia’s Wujudkan and BursaIde. Or they can use Indiegogo, which supports crowdfunding projects around the world.

ABOUT THE WRITER:

Paul Spinrad, Editor, Investian.com Paul is a frequent writer about the crowdfunding revolution. He was the first person to propose and pursue a crowdfunding exemption to U.S. securities laws, which was passed as part of the JOBS Act of 2012 and which has since been mirrored in several state laws and bills. Paul was previously an editor at MAKE magazine and Wired magazine. He began his career by writing software for government and business applications. Contact Paul at pspinrad@panix.com

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