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Money From the Masses

Crowdfunding sites let entrepreneurs leverage the power of peer persuasion.

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This story appears in the January 2011 issue of Entrepreneur. Subscribe »

Tapping the power of crowds has become popular in many areas of business, so it was only a matter of time before it made its way into funding. Now, a coterie of crowdfunding sites for small businesses, artists and other small commercial enterprises has cropped up. Sites like ProFounder.com, Kickstarter.com and peerbackers.com allow entrepreneurs and artists to find donors to support their projects. Most of the time, these "investments" are really donations that the entrepreneur has little or no obligation to repay, let alone deliver a return. But even companies that collect investments in amounts of $25, $50, or $100, as many crowdfunded businesses do, need to be sure they're complying with securities laws.

"From a legal perspective, it can get tricky," says Hank Heyming, an attorney and serial entrepreneur in Richmond, Va. "When you do the gift model, a lot of times people are giving something in return." It's important that any item given to funders not have significant value, or it could be considered an offering and run afoul of Securities and Exchange Commission requirements.

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