The Pros and Cons of Crowdfunding

By: Lori T. Williams, Owner/Managing Attorney of Your Legal Resource, PLLC

I interviewed Birmingham attorney, Michael Melfi, about his perspective on crowdfunding, since some of his clients have successfully raised capital this way. Michael is an intellectual property attorney, who focuses on cyber law, social medial law, Digital PR, and reputation management for his clients. Michael was recently mentioned in an article in Crains, involving his client, Fundington LLC -- a crowdfunding portal that assists projects, existing companies, and inventors in raising capital.

Earlier this year at the Mackinac Conference, crowdfunding was mentioned as the next potential avenue for startups to capitalize their business.   (Click here for article).

So what is Crowdfunding?

Wikipedia defines it as "the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations.[1] Crowdfunding is used in support of a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, startup company funding,[2] movie[3] or free software development, and scientific research.[4]  Crowdfunding can also refer to the funding of a company by selling small amounts of equity to many investors."

The JOBS (Jump Start Our Business Startups) Act signed into Law by President Obama on April 5th expanded the concept of crowdfunding, to allow more investors at smaller amounts each. (See Forbes article and JOBS Act, and the National Crowdfunding Association Website for more information).

HOW DID YOU GET INVOLVED IN CROWDFUNDING, MICHAEL?

"I have been following the industry for the last few years and four months ago, a former business partner asked me to get involved in a project as the General Counsel for his company, Fundington LLC.  I have been asked to oversee all the Intellectual Property and Corporate legal work, as well as assist with developing the strategic plan for execution by the team. Additionally, my strong background in digital marketing and social media has been very helpful in assisting the team as they plan for the roll out of their project."

HOW DOES CROWDFUNDING GET AROUND THE SEC RULES ON PUBLIC CAPITAL RAISING?

"One of the key provisions of the JOBS Act expanded crowdfunding and amended the Securities Act of 1933 to add a new registration exemption intended to allow companies to raise capital from a large number of people through the Internet and Social Media.  The JOBS Act directs the SEC to pass rules to enact and regulate crowdfunding 'for the protection of investors and in the public interest'."

DO YOU SEE CROWDFUNDING AS AN EMERGING PRACTICE AREA FOR YOU?

"Yes.  I'd like to do more of this type of work.  I've been speaking nationally on the subject to spread awareness."  See Michael's PowerPoint that he often uses during his speaking engagements on Crowdfunding.

Shawne Duperon is another friend of mine who had a positive experience with crowdfunding, when she launched a film project known as Project Forgive. Shawne's documentary highlights heartfelt stories from people in the community and throughout the world, such as Gary Weinstein who lost his wife and 2 sons in a car accident with a drunk driver a few years ago. "Forgiveness is a critical component in the grief process, so that those suffering a loss can be made whole and go on to live productive lives."

As a Six Time Emmy winner and media professional for 2 decades, Shawne was inspired to tell these stories through film.  "Our society has been captivated by video and social media, so we decided to play in today's technology and raise funds and tell our story through social media." Because she was so successful raising more than $100K in a little over three weeks, she created an mp3 to help others crowdfund. You can find it at Project Forgive's Facebook page.

As with any new initiative, there are pros and cons.  For some examples of the downsides of crowdfunding, read these articles:

Crowd funding scams top investor threat: Regulators

Crowd funding's Darkside: When Investments Fail

As with any investment opportunity, due diligence is critical so you know what you are getting into with respect to the business model and the decision makers/equity owners of the business.  There is still risk no matter what, because raised capital doesn't guarantee a successful return on investment. Crowdfunding treated as a donation to a cause you believe in, with only small amounts of money pledged can take some of the sting out of it if the overall goals aren't reached. However, as an investment opportunity, more research should be done before committing your funds if you have an expectation of return on investment.

POINTS TO PONDER AND SHARE:

What are your thoughts on crowdfunding?

Do you see it is a viable capital raising avenue for startups, or more as a social donation campaign?