A crowdfunded planting
As many farmers and founders of food-based businesses have discovered, crowdfunding is a tool that can enable you raise anywhere from thousands, to tens of thousands, to hundreds of thousands of dollars to launch projects that might never have gotten off the ground otherwise.
But what type of crowdfunding are we talking about? The conversation can get confusing quickly, because people use the term “crowdfunding” to refer to any of several techniques to raise funds from a large number supporters, customers, and/or any other stakeholders. Different laws apply in each case, and what might work for one project might not make any sense at all for yours. So before you start investigating options for financing your permaculture project, it pays to get clear on the three different types of crowdfunding.
1. Gift Raising
One of the most common forms of crowdfunding is the practice of using online crowdfunding platforms (such as Kickstarter, IndieGoGo, GoFundMe, or WeTheTrees, a permaculture-specific platform) to raise gift money from donors in exchange for tokens of appreciation. A reward scheme in a gift-raising campaign might look something like this: “If you give $20 or more to support the creation of this urban herb spiral, we’ll give you a big Thanks on our website.” “Everyone who gives more than $100 can design a special brick that we’ll build into the spiral.” “We will publicly thank everyone who gives $500 or more at the opening ceremony.” And so on. The key factor differentiating crowdfunding campaigns designed to raise gift money is that the monetary value of the rewards you offer to entice people to support your project is much less than the amount of their gift. If any individual gives you more than $14 thousand, then they’ll need to pay attention to the laws related to gift taxes.
A second form of crowdfunding involves a business collecting payments in advance for products to be delivered at some later date(s). These products might be offered at a discount during the campaign period to encourage people to “invest” (or really, spend) more cash up-front. “Support our campaign to build a new certified kitchen at the $40 level and receive 6 quart jars of our award-winning salsa, which usually retail at 7.50 apiece.” “Supporters at the $60 level will receive a case of 10 bottles of salsa.” Or the value proposition might look something like this: “Subscribe to our weekly veggie box program: $20 / box if you pay for 6 months in advance, or $25 / box if you pay for 3 months in advance.” Pre-sale crowdfunding campaigns in the latter case are very similar to community supported agriculture (CSA) models.
Do you need to use an online crowdfunding platform to do pre-sales? Nope. Campaigns to raise money for projects that have retail appeal lend themselves well to the online crowdfunding platforms (you see them all the time on Kickstarter and IndieGoGo), but you could also launch a pre-sales crowdfunding campaign through sales of paper gift certificates, or any system that tracks so-called “stored value.” Credibles is an online platform designed specifically for established food businesses looking to raise money from their customers and fans. The bank that helps you process credit cards might help you create electronic gift cards to sell to your customers. If you’re a lower-tech kind of person, you can keep a notepad at your cash register that tracks your customers’ balances. In all cases, make sure you pay attention to your state’s laws regarding gift certificates and stored value, and talk to an accountant about the sales tax and balance sheet implications of your crowdfunding campaign.
Note: you can absolutely mix the gift-raising and pre-sales approaches. “Give $60 and receive a case of 10 jars of salsa.” And for the same campaign: “Give $1000 and receive a case of salsa, plus an exclusive invitation to our next garden party.” The trick is to offer reward levels that will be compelling to the people that you believe will support your project, whether you offer them good product value or feel-good value.
3. Selling securities
In addition to raising gift money and pre-selling products, you can offer people financial returns to reward them for the risk of investing in your project. This is the third type of crowdfunding. It’s definitely the most complicated from a legal perspective.
People sometimes call this form of crowdfunding “equity crowdfunding” (because you can use it to sell shares of your company, aka selling equity). An example of an equity offering: “We’re selling shares of our company for $100 each, minimum investment $1000, and we’ll pay you a 6% dividend annually.” But the law also considers it “selling a security” when you ask lots of people to lend you money, in which case, your offering would look more like this: “lend us $1000 or more for a term of 5 years at 5% interest, which we’ll pay you annually on October 31st, and return your principal in a lump sum at the end of the 5-year term.” (These simplified examples are for illustrative purposes only, as the terms for securities are usually a lot more complicated.)
So the name “investment crowdfunding” is more accurate than “equity crowdfunding.” Without getting too deep into the legalese, here’s a good rule of thumb: if people expect to get some money back in return for their investment, you’re probably offering a security, and you will definitely need legal advice in order to proceed on the right side of the law. Expect to pay an attorney to help you file a pile paperwork with federal and/or state regulators wherever you expect to find investors. There’s even more paperwork required if you intend to raise money from many everyday people (as opposed to wealthy people, or “accredited investors” only, and yes, the laws treat wealthy and non-wealthy people differently).
Websites like CircleUp are already set up to help you sell equity to accredited investors online. Part of the JOBS Act that was signed into law in 2012 was designed to make it easier for small businesses to do investment crowdfunding from anyone, but as of this writing, we’re still waiting for the exact legislation. Once it is announced, there will likely be several new online platforms designed to help people to raise money through investment crowdfunding from wealthy and non-wealthy people alike.
In the meantime, if you’re interested in offering securities to a large number of people, you may want to consider a direct public offering, or DPO. You can sell equity, raise debt, offer any other type of investment opportunity through a DPO, and it’s legal already. You will still have to pay professionals to help you do it, but there is less paperwork and it can be less expensive than other forms of securities offerings. Cutting Edge Capital’s website is a great place to start if you want to learn more about DPOs, as they are working hard to make the process of doing DPOs easier and less expensive for small businesses.
So those are the three types of crowdfunding: gift-raising, pre-sales, and investment crowdfunding. If one seems like it could be a good fit, study up on how to design and promote a successful campaign, but keep in mind that these represent only a small fraction of the increasing number of financing options out there. Take the time to learn about all of them as you assess which might work best for you given your values, priorities, and intentions for your permaculture project. This will put you in a better position to cultivate long-lasting financial partnerships that benefit all of your project’s stakeholders.
Elizabeth Ü is a business coach, consultant, writer, and speaker with over a decade of experience at the intersection of finance and food. Her book Raising Dough: The Complete Guide to Financing a Socially Responsible Food Business (Chelsea Green Publishing, 2013) covers all three types of crowdfunding in more detail, tips for pulling off a successful campaign, and the full range of fundraising techniques for raising small business capital from individuals, foundations, financial institutions, government agencies, and your community.