Crowdfund Investing For Dummies
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When shopping for a crowdfunding portal, you must consider several things, including how much the online platform will cost and whether it has any limitations that will impede your efforts.

Anticipate the cost

Expect that whatever funding portal you choose will, at a minimum, charge you a flat fee for registration and for conducting a background check on you. Beyond that flat fee, you’ll likely be charged what’s called a success fee if you hit your funding target.

The success fee likely represents between 4 percent and 10 percent of the money your raise. (Broker-dealers charge much higher success fees because they have a higher cost structure.) Keep in mind that the more bells and whistles a funding platform has, the more it’ll cost.

In all cases, you should be able to determine in advance the costs associated with your chosen funding portal; its terms and conditions should spell out its fees very clearly. You want to build these costs into the money you raise — assuming that you hit your all-or-nothing funding target. (If you don’t hit your funding target, any time, energy, and money you put into your pitch will most likely be your loss.)

When you find out the costs associated with your chosen online platform, build those numbers into your financial projections. If you didn’t account for these costs when budgeting, back up and do so before determining exactly how much you need to raise in your crowdfund investment campaign.

Ask the right questions

When choosing your funding portal, make sure that it offers good customer service. When you ask questions, expect good — and prompt! — answers. You shouldn’t need to wait days for answers, and you shouldn’t need to ask a question twice.

When you do find a responsive portal, make sure you’re asking the right questions. Here are some suggestions:

  • What services does the portal offer? Home in on the services you really need help with, and make sure the portal has what you need.

  • How can you create the best possible online pitch? You benefit by getting advice from people who really understand crowdfund investing. A good portal wants to give you this type of advice because it wants you to succeed.

  • What percentage of projects that they've hosted have been fully funded? What might make the difference between success and failure? Again, you want a portal that’s willing to share insights based on past experience.

  • How do they handle ongoing communication between companies and their investors when a campaign has succeeded? You absolutely need an easy way to communicate with investors. You can’t exchange e-mails with a few hundred people while trying to build a business!

  • Are they geared toward your type of business? Some portals may be more suitable for Main Street businesses; some may be better for more tech-related businesses; and some work with a cross-section of industries and businesses.

  • Who owns the copyright? A portal should make it clear that it holds no title or claim to your copyrights (if you have any). If a portal’s contract is not crystal clear on this point, run in the other direction.

  • What are their limitations? No portal can possibly offer every service an entrepreneur or business owner needs, but it should represent itself with accuracy and transparency. If you suspect that you’re getting a half-baked answer to this question, keep shopping.

  • Can you get a refund? Suppose that you try to raise money on a crowdfund investing platform, and you fail. Can you get a refund for the registration and background check fees you’ve paid to the funding portal? No platform can guarantee success in raising capital for your business; it can only provide a service to help you achieve your goals.

    Therefore, you should expect the answer here to be no. However, you want reassurance that if your failure relates in any way to significant technical issues caused by the platform itself, or to services that were promised but not delivered, you can seek a refund of these initial fees.

Any platform you choose should offer terms of service that a human being can read. Even after you select a funding portal, don’t sign the paperwork if you can’t understand it. Be sure to ask a lawyer for advice if you’re unclear. Spending a small amount of money to know exactly what you’re getting from your funding portal is worth it so you know your rights and responsibilities.

You may want to ask for a generic contract to consider while you’re shopping; any reputable portal should be willing to share its terms of service upfront so you can make an educated decision.

About This Article

This article is from the book:

About the book authors:

Sherwood Neiss, Jason W. Best, and Zak Cassady-Dorion are the founders of Startup Exemption (developers of the crowdfund investing framework used in the 2012 JOBS Act). They deeply understand the process, rules, disclosures, and risks of capital formation from both the entrepreneur's and the investor's points of view.

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