You've probably heard about raising money online through some of the best-known crowdfunding platforms—sites like Kickstarter, Indiegogo, RocketHub, ArtistShare, and Sellaband—and you might have wondered whether this approach could be used to fund startup companies. Under the crowdfunding model, supporters of a project contribute funds to support something they believe in and receive rewards or perks in exchange.
The key thing to understand is that in traditional online crowdfunding as it existed in the United States from 2003 until 2014, supporters are not in any way purchasing ownership in the company or project, nor will they receive any benefit from the success of the project other than the promised product or thank you gift.
Another activity using online platforms that is sometimes confused with crowdfunding is peer-to-peer lending. Like crowdfunding, peer-to-peer lending is not a form of equity investment, since the lenders do not acquire an ownership interest (and thus a share of the profits and losses) in a company. Instead, they are simply lending money to a person at a fixed interest rate.
As these strictures make clear, an entrepreneur cannot use Kickstarter or other traditional crowdfunding sites to raise equity capital for a business. However, this limitation has recently changed.
The JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act was signed into law by President Barack Obama. Known as the JOBS Act of 2012, ...