[US Corporation] Crowd Funding Information and its tax accounting update for a corporation doing business in the USA

[US Corporation] Crowd Funding Information and its tax accounting update for a corporation doing business in the USA

Why Crowd Funding

There are a few main reasons for using crowd funding instead of traditional means of raising capital as follows.

(1) Accessibility

The crowd funding has the appeal of a direct investment, particularly one that is relatively seamless online because the public is very comfortable with electronic platforms for commerce, shopping, and investing its costs are relatively low while financial institutions were not good at evaluating risk for technology innovation or creative ventures, making traditional access to capital more tightened and more difficult.

(2) Community

By building a community around a venture or an idea, entrepreneurs and business owners immediately connect with customers, clients, and supporters. Such connection is invaluable to entities as they grow and evolve. And the community serves as a venue for market research as well, not only for minimally viable products, but also for testing new ideas, gauging enthusiasm, and soliciting feedback. Furthermore, investors—particularly younger ones—crave a connection with the companies they support, and crowd funding is a way to connect these early adopters more closely with a company's brand. Financial institutions have relatively poor relations with the public.

(3) Return

Those with funds in savings accounts may be looking for slightly better returns on their cash, while minimizing risk through pooled (or crowd-based) investments while Interest rates on savings accounts of a financial institution are very low (close to zero).

(4) Diversity

Not only is there diversity in investment options, but crowd funding investors appreciate the inherent diversity these investments provide to their overall portfolios.

(5) Regulation

The Jumpstart Our Business Startups (or JOBS) Act of 2012 by Obama Administration and subsequent regulations facilitates startups and small businesses funding through the crowd funding, which contributes to startups and small and medium sized business ecosystem, and represents a disruption in the environment that will change some aspects of the industry.

Crowd funding comparison

Category	Equity crowd funding	Debt crowd funding	Contribution crowd funding
Definition	Investors exchange cash for a share of future profits in the company (equity).	When investors exchange cash for debt, this is often called microlending. Microlending is "a form of financing that provides [relatively] small amounts of money to entrepreneurs.”	Members of the public in contribution crowd funding make a contribution (gift) to something they find compelling in exchange for a small token of gratitude.
Funding scale	$662 million in the first quarter of 2015 and $483 million in the fourth quarter of 2014	As of March 15, 2016, 1,394,336 lenders have loaned $827,356,850 through Kiva with a 97.1% repayment rate.	9.3 million people, $1.9 billion pledge, and 91,000 projects since 2009 for Kickstarter Monthly 15 million people visit in its site from 224 countries for Indiegogo
Platform	Grow Venture Community, MicroVentures, Angel List, CircleUp, Alpha Works, Founders, and Seed Invest, Quirky, Crowdrise, Rock the Post, Fundable, Early Shares, Razoo, Sprigster (for veterans), Empasis (for journalism projects), Microryza (for science projects), TuneFund (for music projects), FundOurPark (for parks), SportyFunder (for sports projects), etc.	Kiva, Prosper, Endurance Lending Network, etc.	Kickstarter, Indiegogo, Rocket Hub, GoFundme (commonly for medical expenses, funerals, memorials or educational endeavor), etc.
Accounting treatment	The cash raised from equity crowd funding investors is recorded as equity, and fee to host platform is booked as investment expense.	The cash raised from debt crowd funding investors is recorded as payable, fee to host platform is booked as investment expense, and the debt’s interest is recorded as interest expense.	Contributions are recorded as unearned income until token are distributed to contributors.
Tax treatment	Investment expenses are generally deductible.	Investment and interest expenses are generally deductible.	Incomes including unearned income are taxable and ordinary and necessary business expenses are generally deductible.

※ Note: there may be subtle differences among the crowd-funding platforms, including fees (who is charged and how much), timing (how long a campaign will remain open), and type (an all-or-nothing funding model versus an anything-goes model).

Funding reference

Type	Platform	Description
Contribution crowd funding	Kickstarter	Zach Danger Brown raised $55,492 from 6,911 people to make potato salad during the summer of 2014. Tokens of gratitude ranged from a thank-you message posted to Brown’s website to a copy of his recipe book. Source: ttps://www.kickstarter.com/projects/zackdangerbrown/potato-salad
Contribution crowd funding	Indiegogo	Stone Groundbreaking Collaborations California raised $2,532,180 from 13,977 people to produce rare craft brews from Stone Brewing Co during the summer of 2014. Perks raged from one 1.5-liter bottle of beer to an invitation to pre-opening party Source: https://www.indiegogo.com/projects/stone-groundbreaking-collaborations--2#/
Contribution crowd funding	GoFunMe	One family raised $101,350 from 922 people in 23 months to repair their home and cars, which were severely damaged by the storm in Colorado during 2013. Source: https://www.gofundme.com/McCroskey-Family-Fund
Contribution crowd funding	Kickstarter	A total of 91,585 backers pledged $5,702,153 to support to revive the cancelled TV show, the Veronica Mars. Contributors received movie swage, tickets to advance screenings, copies of the DVD, and even a walk-on role in the movie in exchange for contributions. Source: https://www.kickstarter.com/projects/559914737/the-veronica-mars-movie-project
Contribution crowd funding	Kickstarter	About 24,833 people pledged $1,192,793 to support the next album of artist Amanda Palmer whose record label was disappointed with the low sales figures on the previous album of her. Source: https://www.kickstarter.com/projects/amandapalmer/amanda-palmer-the-new-record-art-book-and-tour

Source: Becker, Kickstarter, Indiegogo, GoFunMe, etc.

The following tax information is for your reference, and is not legally binding.