There is a new funding source on the block, and it’s the talk of the financial town – crowdfunding. Crowdfunding allows a wider group of individuals the opportunity to invest in business concepts.

There is a new funding source on the block, and it’s the talk of the financial town – crowdfunding. Crowdfunding allows a wider group of individuals the opportunity to invest in business concepts.

The Pitch – How it works.

A business owner would prepare a business plan and pitch it online to a pool of potential investors. The pitch includes the legal structure of your business, the owners, the project description, outline of the products and/or services and the amount needed by the business and disclosure of financials.

There is a variety of equity crowdfunding platforms that connect business owners with potential investors, such as CircleUp or crowdfunder.  Each investor can log in, view all proposed pitches and pick the one in which he or she would like to invest. The investor pledges funds, no more than $10,000 each or 10% of net income, towards a project, and is reaps a return in goods and services, or repayment of funds. Basically the public decides which ideas should be launched and are worthy of investment versus which ones are not.

Who Can Invest?

Today an investor is defined by their personal wealth. There are those who make less than $200,000 annually, or have less than 1 million in the bank – the nonaccredited investor. Then there are those who have more – the accredited investor. Only an accredited investor can be presented with, and can invest in an opportunity in which they do not know the founder. Plus, it’s illegal for the business owner to fundraise publicly to attract investors. No tweets, no LinkedIn updates, no Facebook posts. The doors may open to include the nonaccredited investor base

Pros and Cons

There are several benefits and risks associated with crowdfunding. We’ve outlined what we think are the top advantage and disadvantage to crowdsourcing.

Benefit – Funding opportunities

Business owners can raise up to $1 million from investors with the proposal. If the proposal includes audited financial statements, owners can raise up to $2 million. It’s estimated that crowdsourcing could produce 10x the total 2011 investments from venture capitalists – a win-win for both businesses and investors.

Risk– Potential for fraud.

By widening the investment opportunities to include more Americans, the door is also opened to less savvy investors. Because funds can be raised without financial reports, the right hustler could make a pitch good enough to defraud hardworking people of their investments.

Is crowdfunding a fad, another option or a revolution? Only time and SEC Rulings will tell. But it’s an option definitely worth researching to see if it should be included in your financing mix.