Although crowdfunding is becoming accepted as a relatively easy way to make money fast, it does have its downsides.
Interestingly, the idea of crowdfunding began as a supplemental tool for people to raise money who found it difficult to do so through traditional methods.
These days, crowdfunding has become the go-to method for some projects. Rather than only seeking a few big financial backers, crowd-funding encourages people to give whatever they can, whether it’s a lot of money or a few dollars.
Even better, if a campaign doesn’t reach its goal, everyone gets their money back. Though people can’t receive an actual financial return for backing a project, they can get other incentives, such as merchandise or recognition.
In spite of how easy crowdfunding sounds, there are challenges for donors and issuers that not everyone realizes.
- Paperwork. Crowdfunding projects, including any revenue, must be filed to the Security and Exchange Commission.
- Management. A crowdfunding project is supposed to be managed by a registered broker/dealer or accredited financial portal. Traditional lenders generally stay away from these. The broker/dealers also must follow the required investment rules of not soliciting investments or offering investment advice.
- Jurisdiction. Non-U.S. companies, public companies, and investment firms are not allowed to use crowdfunding in the U.S.
- Giving caps. People can only give a certain amount of money to crowdfunds over a year period. This figure is 10 percent of annual income if someone has income over $100,000, or $2,000 or 5 percent of their annual income or net worth if their income is less than $100,000.
- Top-end limits. While your typical campaign is usually for a few hundred or a few thousand dollars, there is a cap on how much a person can earn in one campaign: $1 million over a 12-month period.
- No ads. No promotion or formal advertising is allowed to attract people to crowdfunding programs. People who have already invested can be contacted and encouraged to spread the word as individuals, but overall organized promotion is not permitted.
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