If you are a thinking about capitalizing your Colorado startup through crowdfunding, you'll need to understand what crowdfunding is, and what is isn't.  While we all wait for the SEC to finalize Crowdfunding Rules (the current SEC Proposed Rules came in at 585 pages), startups and states are not sitting tight but are finding ways to raise capital.

There are two main models of crowdfunding: Reward Crowdfunding and Equity Crowdfunding

Reward / Donation-based Funding

Reward / donation-based crowdfunding is the most common form of crowdfunding today with sites like Kickstarter and Indiegogo which connect businesses with funders who donate toward a funding goal in return for products, perks, or rewards.  With reward crowdfunding, businesses do not sell portions of their companies (equity), rather, they provide rewards such as t-shirts or products to those who donate a certain amount of money.

Investment Crowdfunding

The second and more recent model of crowdfunding is equity crowdfunding or investment crowdfunding, where businesses seeking capital sell ownership in their company in the form of equity.  With equity crowdfunding, individuals who fund (invest) become owners or shareholders and have an interest in a potential financial return, unlike in the donation model.

Interstate vs. Intrastate Crowdfunding

While the SEC Crowdfunding Rules will apply to those companies crowdfunding across state lines, some states have taken it upon themselves to pass laws allowing crowdfunding between companies and investors within their states.  In states that have enacted such crowdfunding laws (Alabama, Michigan, Wisconsin, Washington to name a few) companies will have to follow the state's laws, but can be exempt from the SEC rules and regulations.  Colorado has not yet enacted such crowdfunding legislation.

Entity Selection and Crowdfunding

Before you begin crowdfunding, it is critical that your startup is properly formed.  Different types of crowdfunding and capital raising call for different types of business entities - and the entity selected can have very serious consequences.  Whether you plan to form an LLC, S-Corp or C-Corp, you should first understand what corporate form is appropriate and will allow your startup to raise capital while protecting your company's assets.

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