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Crowdfunding Could Be the Answer to Your Cash Woes

A host of websites have sprung up to help people raise money from supporters.

Crowdsourcing has moved to the money arena, tapping the power of larger audiences to provide funding options for startups and established businesses. A host of websites dedicated to crowdfunding are popping up, matching small businesses, soloists and artists with people willing to invest in projects they find worthy of support.

In most cases, fund-seekers simply sign on to one of these sites, create a profile and start asking for money. Naturally, investment sizes vary depending on the individual investor and the specific website's regulations. For example, you'll find that some sites specialize in small investments, while others require a minimum commitment.

Crowdfunding Sites to Consider
ProFounder.com: Investors are typically invited by the owner of a business venture (someone they know) to pledge a specific amount. Entrepreneurs agree to a revenue-sharing model where a portion of the profits are reserved to pay returns to investors. The site touts the potential for "unlimited return," but, like most crowdfunding ventures, if the business doesn't make money, neither do investors.

MicroVentures.com: Investors fill out a questionnaire and must be accepted. From that point, investment commitments range from $250 to $5,000, withdrawn immediately from the investor's bank account. The offerings through the website are "restricted securities," which cannot be resold without registration or an exemption from registration under applicable federal and state securities laws. Investors will ordinarily have to wait at least one year before an exemption may become available so they can resell the shares purchased.

peerbackers.com: Primarily used by small businesses and charitable causes, entrepreneurs seeking money can offer some of their own products or services to investors. For example, The Cupcake Suite, a startup proposed by a trio of New York City cookbook authors, sent backers two recipe cards and a box of cupcake truffles for a $10 investment and a half-dozen whoopie pies for $25.

Related: OpenIndie.com -- Reeling in Funds from Fans

The Fine Print
The terms on these investments vary from site to site, too. Peerbackers.com typically does not have repayment terms, instead positioning itself as a goodwill way for friends, family and other contacts to support an idea. ProFounder.com, on the other hand, promotes a revenue-sharing model so investors receive a return. Either way, Richmond, Va., attorney Hank Heyming says entrepreneurs need to be sure they're complying with securities laws, which require various filings, disclosures and other actions for businesses which are publicly selling equity.

"From a legal perspective, it can get tricky," Heyming says. "When you participate in the gift model, a lot of times people are giving something in return." But at the same time, he says it's important that the item given in exchange for an investment not have significant value, or it could be considered an offering and run afoul of Securities and Exchange Commission requirements or other laws.

Think crowdfunding might be for you? Be sure to read the fine print about any commitments you're making to the site and investors. Heyming also suggests being aware of how you can extract yourself from the agreement if you are dissatisfied.

Gwen Moran is a freelance writer and co-author of The Complete Idiot's Guide to Business Plans (Alpha, 2010).

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This article was originally published in the June 2011 print edition of Entrepreneur's StartUps with the headline: Crowdfunding: Money from the Masses.

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