Introduction
John Tozzi recently wrote an article in the financial section of Businessweekly.com on crowdfunding. He paints a scenario that depicts fears that have been seen as major setbacks to the successful implementation of crowdfunding. The uncertainty presented is about the possibility of companies ending up as pyramid scams and matrix scams while unscrupulously acquiring capital from unknowing investors.
The recent signing of the Jumpstart our business start-ups by Barrack Obama, the US president, brought relief for the acquisition of capital through crowdfunding. An article on businessweek.com reveals that the possibility of crowdfunding would provide a platform for scams and numerous frauds. Crowdfunding refers to the purchase of stakes of private entities to ordinary online investors as opposed to public knowledge of crowdfunding, which is commonly argued as pulling resources together to support causes as facilitated by Kickstarter and Indiegogo.
Current scenario of crowdfunding
Reforms and regulations are required in the economy to ensure that possibility of fraud is restricted. Several companies have classified themselves as crowdfunding start-ups despite operating with exemptions from securities laws. With this in mind, the companies are required to restrict themselves to certain investor audiences who can understand the risks of investment. Allowing the general public to participate in crowdfunding implies that they may end up making investments without a sufficient grasp of the risks involved. For this reason, the fear of fraudsters carrying the day posed a major challenge towards the legitimacy of crowdfunding. Crowdfunding like any investment requires speculative thinking, high risk, and high failure rates. This implies that the issuers must provide sufficient information to prospective investors to make an informed decision.
Benefits of crowdfunding
There are numerous benefits that business enterprises can achieve from crowdfunding. Business enterprises flourish based on the aid they attain through crowdfunding. Crowdfunding requires the establishment of a platform, either an individual or entity and a community of potential financial contributors that collectively contribute funds. It is important to understand the benefits that crowdfunding offers to business enterprises. However, before recognition of these benefits, enterprises have to disseminate sufficient information to potential investors to ensure that they do not pose as fraudulent or illegitimate entities.
Business enterprises are likely to benefit from the easier capital acquisition. This implies that they do not require to trade equities and borrow externally from financial institutions and banks. This removes restrictions on capital sources. It equally reduces risks as business entities may experience uncertainties regarding market challenges and forecasting issues.
Social Proof and investor confidence
Crowdfunding also helps business entities in generating traction which ensures that they attain pre-orders from prospective customers and investors in the market. The relevance of traction is about providing sufficient backing for launching their products and services in the markets that they intend to operate in. It also provides a platform that supports marketing by engaging supporters and ensuring an ever-growing audience.
Crowdfunding as a marketing tool ensures that through virtual visits, these entities gain the attention of potential funders. Furthermore, it provides a platform for brainstorming ideas as the business entity may gather sufficient feedback, ideas, and comments at an early stage that is valuable especially at the early stage of the business. They can equally benefit from adopting other potential ideas.
Providing supporting information
There are several ways that business entities can provide sufficient information to their investors. One option is to consider press coverage which refers to the provision of helpful coverage like features of the company in news stations, print and online publications. Press coverage guarantees the possibility of more people being informed about the business prospects and ensures the creation of brand awareness which will be sufficient for business start-ups.
Conclusion
In conclusion, it is important to note that attracting potential investors will depend on the ability of the business entity to distinguish itself in terms of gathering enough traction and social awareness. The concept of proof ensures efficient market validation as this implies that the business entity has proven to command respect and attain credibility.
Works Cited
Tozzi, John. Crowdfunding’s on Hold. So is Crowd Funding Fraud. n.d. Web.