A new startup business model: appeal directly to the crowd. In recent years, one of the most important effects of the vast reach of the internet has been the growth of creativity and innovation. It gives almost anyone with an idea the ability to bring it to the public for the chance to see it through to fruition. Usually, the hardest part of getting started is the initial funding. Traditionally, this would come out-of-pocket or from venture capitalists and angel investors, if the creator was lucky. However, new websites such as Kickstarter, PleaseFund.Us, ArtistShare, IndieGoGo, and many more, now provide a platform in which creators can use crowdfunding, a.k.a. crowd financing or equity crowdfunding, to raise capital, interest, marketing and valuable connections for their projects. Crowdfunding is essentially the process of having the general public contribute money and other resources to support the endeavors of other people. These ideas run across all industries and areas, including art, music, disaster relief, startups, political campaigns, book publishing, and film financing. Individuals can choose to financially support any idea they like and as many as they like.

ArtistShare is considered the earliest crowdfunding site (specifically music-related) but one of the most well-known sites might be Kickstarter. This site provides a platform for entrepreneurs to pitch ideas directly to anyone using the internet. For Kickstarter, a person must apply to have his project posted on the site and meet a few guidelines. The webpage will show the “pitch,” which often includes a deadline and target goal of funds to raise, photos, videos, summary, the people behind the idea, etc. Often, a pitch will also provide incentives to donate, rather than equity or a share of profits. For instance, a friend of mine is writing a children’s book; for one donation amount, you can receive an e-copy but for a higher amount, you receive a signed hard copy. These types of personal incentives really exemplify what the money you donate is going towards, especially if in material form. Kickstarter provides a platform for ambitious entrepreneurs to try and solicit small investments from site visitors.

Kickstarter and some other sites will hold the funds in an escrow account so that if the chosen target is not reached by the deadline, no funds are collected. This provides a bit of a security blanket for hesitant potential backers. For this services, Kickstarter takes 5% of the funds raised. Other sites such as Fondomat, IndieGoGo and RocketHub allow projects to keep all funds raised.

The beauty of crowdfunding is that ideas and projects can be in any discipline or industry, whereas before, a few people with a lot of money could choose which ideas to support and usually in very specific disciplines. Something like an art project usually got funding through grants, and only small amounts were available in most cases. Crowdfunding allows a lot of people with less or little money to support ideas they would like see to developed. The projects that get funded are a direct reflection of the types of ideas the public wants to see move forward, and shows the direction of innovation in all types of industries. Kickstarter turned three in late April, and has raised about $200 million for 22,000 projects so far.

There is no guarantee that people posting projects on Kickstarter will deliver on their projects or even use the money towards their projects. This requires blind faith and good judgment that must be made on the part of the individual donor. Although most people seem to use the site properly, as with anything, some people will abuse the system. One recent project turned out to be a potential scam and was uncovered by two other Kickstarter users. A purported video game called Mythic: The Story of Gods offered backers the chance to participate in game development, even voicing characters and being embodied in the game through motion capture at Disney Studios. The Disney claim was suspicious and after only $4,739 was raised of the intended goal of $80,000, the creator of the project pulled out. While there have been few similar tales, 22,000 honest projects have been real and supported. Kickstarter has its Project and Community guidelines but there is no mandatory filtering mechanism. Relying on the policing of Kickstarter users is a both a pro and a con.

Another issue with crowdfunding was failing to comply with securities laws, since soliciting investments from the general public is illegal unless the opportunity has been filed with the S.E.C. This issue is addressed with the recent passing of the Jumpstart Our Business Startups (JOBS) Act, which encourages funding of small US businesses and eases the securities restrictions on them. The JOBS Act creates a new crowdfunding exemption that will permit a qualifying company to raise up to $1 million a year from individual investors in increments that might range from $2,000 to $100,000 per person with limits based on investor income and net worth. This allows an offer of equity in return for financial support. New companies using crowdfunding would have new responsibilities as well, such as filing annual financial statements. Still, individual small investors may become more vulnerable to possible scams because many investor protections have been bypassed.

While more laws could be put in place or sites such as Kickstarter could do more policing, this would remove the crowd aspect of crowdfunding. The public has the freedom to decide what endeavors it wants to support and with this freedom will come the occasional scam that slips through. If the government or the websites regulate more, fewer people will want to take part in crowdfunding. Like the old caveat, “investor beware” seems apropos here. Sites such as Kickstarter provide the platform but the crowd should ultimately be in control.