“Crowdfunding” is a generic, catchall term commonly used to refer to various methods that startups may use to raise funds in modest individual amounts from a large, dispersed group of strangers (the “crowd”) through an online platform. Many people are unaware, however, that there are at least five distinct types of crowdfunding in the U.S. that are available to startups in need of capital:
- Rewards crowdfunding
- Accredited crowdfunding
- Federal crowdfunding
- State crowdfunding
- “Mini” public offerings
Each type of crowdfunding is governed by different (and sometimes overlapping) regulatory regimes and has varying costs, benefits and drawbacks from a startup’s perspective. Before undertaking any type of crowdfunding offering, startup founders and their advisers should have a robust understanding of the merits and shortcomings of each type as a fundraising tool, especially when compared with more traditional fundraising options such as venture capital (VC) or angel financings.
