For many inventors looking to launch a product to a market, crowdfunding is becoming more common in raising funds for a project.  In 2014, crowdfunding raised approximately $16.2 billion in the United States alone. While that might seem small in comparison to the total capital raised in more traditional ways, that figure represents a 167% increase in the amount raised in 2013.  Crowdfunding is only becoming more popular. While there are various types of crowdfunding, rewards based crowdfunding is receiving a lot of attention of late. If you need information about rewards based crowdfunding, this article discusses what it is and how to do it.

What is Crowdfunding?

Crowdfunding refers to a particular way of raising finance, usually in small contributions, from a large number of people.  Typically, an individual or organisation launches a campaign or project for funds through a crowdfunding site such as Kickstarter or Indiegogo. They also usually prepare a promotional video detailing why they need the money to stimulate interest in their project.

The kinds of people and organisations who choose to crowdfund vary. They include entrepreneurs, small businesses and not-for-profits. However, the crowdfunding platforms and intended psyche tend to make it especially popular among video gamers and individuals needing funds for technology oriented projects.

What is Rewards-Based Crowdfunding?

Rewards based crowdfunding operates in a similar fashion to regular crowdfunding campaigns. The difference is that for this kind of crowdfunding, the person or organisation launching the project offers rewards to the public in exchange for funds. The reward acts as an incentive for people to donate to this campaign as opposed to another one. Typically, the rewards vary depending on how much money a person gives.  

It is important to know that the rewards offered in rewards based crowdfunding do not offer equity in a company.  That kind of crowdfunding is called equity-based crowdfunding. In that scheme, a company gives equity in exchange for capital. 

While providing equity might seem like a reward and be similar to rewards-based crowdfunding, equity-based crowdfunding has entirely different legal considerations and questions. 

To illustrate, consider a corporation that wishes to raise capital. A corporation would do this traditionally by issuing shares. It would also have to abide by strict laws and regulations in Australia. These laws relate to how they raise the capital and what information they need to disclose. The similarity with equity-based crowdfunding positions it within the same area of corporations law, which highlights its difference to rewards based crowdfunding.

The rewards offered in rewards based crowdfunding vary between projects. As those seeking funds must market their campaign, they need to make sure that their rewards are creative, quirky and appealing. If they are, they have a greater chance of raising more money. For example, an individual who needs money to publish their book independently could provide rewards like mentioning a donor in the books credits (if they give a substantial donation) or receiving a copy of the first chapter free or having a vote on the final selection of cover designs.

How To Setup a Rewards Based Crowdfunding Campaign

Like everyone else who needs capital and who must market to do so, rewards based crowdfunding requires hard work and creativity to be successful. You will need to stand out. Below are four simplified steps to set-up a campaign:

  1. Choose a crowdfunding platform that is best for you and determine a deadline.
  2. Establish what rewards you will give and the amounts needed to receive those rewards.
  3. Create a promotional video which will capture people’s attention and encourage donations. Be clear about your project and what you want to achieve with the funds obtained.
  4. Share your video with friends and family and recommend sharing. Consider how you can further promote sharing from those who have donated to bring momentum to your crowdfunding.

The crowdfunding deal tilts and you will receive the crowdfunding money when you have reached your funding target (hopefully before the deadline).

It is essential that when this happens you ensure that your donors receive their correct rewards promptly. If you are tardy or fail to reward them at all, it could lead to all sorts of difficulties for you not least bad publicity. If you ever wish to crowdfund again, you have a vested interest in ensuring that you keep your end of the bargain.

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Contact LegalVision’s qualified lawyers to assist you. Questions? Call us on 1300 544 755 or fill out the form on this page.

Carole Hemingway

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