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Funding movement targets small entrepreneurs

Crowdfunding benefits entrepreneurs, allows investments with average incomes

Published: Monday, June 11 2012 8:16 p.m. MDT

Brian Meece, one of the founders of RocketHub,  speaks at the Brian Meece, one of the founders of RocketHub, speaks at the "CrowdFunding Made Simple" conference at the University of Utah Guest House and Conference Center on Friday, June 1, 2012. (Laura Seitz, Laura Seitz, Deseret News)

SALT LAKE CITY — Utah entrepreneur Phillip Chipping made a name for himself as the founder of the company now known as ZAGG — best known for its line of protective coverings for consumer electronic products and hand-held devices under the brand name InvisibleShield.

The company's products are sold at retail locations nationwide, including a prime Main Street location at City Creek Center in downtown Salt Lake City.

Chipping sold his interest in the company and is working on a new endeavor aimed at improving children's literacy called Knowonder. The project needs $10,000 of initial capital, and Chipping is making a foray into a new funding area to get it started.

Welcome to the world of crowdfunding.

Brian Meece, left, and Jed Cohen, founders of RocketHub, speak at the Brian Meece, left, and Jed Cohen, founders of RocketHub, speak at the "CrowdFunding Made Simple" conference at the University of Utah Guest House and Conference Center on Friday, June 1, 2012. (Laura Seitz, Laura Seitz, Deseret News)

Crowdfunding — also known as crowd financing, equity crowdfunding or hyper funding — is an approach to raising capital for new projects and businesses by soliciting contributions from a large number of stakeholders. Financial contributions are typically made by online investors, sponsors or donors to fund for-profit or nonprofit initiatives or enterprises.

"The reason we think our business will work well in that model is two-fold," Chipping said. "It's a powerful social cause … things that really do well are (projects) that really pull people in emotionally."

He said when people feel "like they are part of something … with social good," they are more likely to want to donate and offer their support.

The key is to offer something in return, something different from the lure of a big payday.

Chipping said he would exchange some "perks" or rewards to donors like autographed copies of their books and literacy materials along with some of the original illustrations.

Jed Cohen, one of the founders of RocketHub,  speaks at the Jed Cohen, one of the founders of RocketHub, speaks at the "CrowdFunding Made Simple" conference at the University of Utah Guest House and Conference Center on Friday, June 1, 2012. (Laura Seitz, Laura Seitz, Deseret News)

He said the money raised would help pay for the book's illustrator, the print run of the first edition and the creation of the interactive digital app for electronic devices.

If the effort is successful, he will be able to create a fully illustrated version of the book and develop the digital apps as well.

"We have limited capital, so anytime we can bring in extra capital to fund the actual project, the better," Chipping explained. "Basically, (this model) is allowing you to pre-sell your product. It allows you to gauge the success of your product."

There are four major types of crowdfunding platforms — equity-based, lending-based, reward-based and donation-based, according to crowdsourcing.org, an industry website. The classifications are based on the funders' primary motivation for engaging in crowdfunding.

Brian Meece, one of the founders of RocketHub, speaks at the Brian Meece, one of the founders of RocketHub, speaks at the "CrowdFunding Made Simple" conference. (Laura Seitz, Laura Seitz, Deseret News)

An equity-based crowdfunding platform (CFP) is a model in which investors receive an interest in the venture they support. Another equity position could include revenue or profit-sharing arrangements.

A lending-based CFP occurs when investors receive fixed periodic income payments and expect repayment of the original principal investment — in stark contrast to equity-based and lending-based models, reward-based and donation-based models are characterized by non-financial motivations for engaging in crowdfunding.

Reward-based CFPs allow investors to gain a non-financial benefit in return for financial contributions. Non-monetary rewards often take the form of a token of appreciation or the prepurchasing of products or services.

The The "CrowdFunding Made Simple" conference was held at the University of Utah Guest House and Conference Center on Friday, June 1, 2012. (Laura Seitz, Laura Seitz, Deseret News)

Donation-based CFPs provide investors with a way to donate to causes that they want to support, with no expected compensation such as a philanthropic or sponsorship-based incentive.

It's been used to fund disaster relief, in support of artists by reaching out to their fans, for political campaigns, and for funding a startup company, movie or small business.

Brian Meece, co-founder of RocketHub — a perks-based crowdfunding platform located in New York City, said his company helps project leaders such as artists and entrepreneurs like Chipping by allowing them to upload their idea plan to a website where prospective supporters can learn about their project and determine if they want to contribute.

"It's a way for a community to come together and really get excited about the project leader, artist or entrepreneur … and it's also a way for them to get something back," Meece said. "People give for a variety of reasons, because they like you or they know of you and like what you're (doing). Reason number three is they want that perk."

Brian Meece, one of the founders of RocketHub,  speaks at the Brian Meece, one of the founders of RocketHub, speaks at the "CrowdFunding Made Simple" conference at the University of Utah Guest House and Conference Center on Friday, June 1, 2012. (Laura Seitz, Laura Seitz, Deseret News)

Meece was among the featured speakers at the first national conference hosted by the Crowdfunding Professional Association on the University of Utah campus at the end of last month. Chipping was one of the nearly 300 attendees.

Crowdfunding is tied into the United States of America JOBS Act — Jumpstart of Business Startups Act — which allows for a wider pool of small investors with fewer restrictions. The act was signed into law in April and takes effect in January.

The U.S. Securities and Exchange Commission has until the enactment date to develop specific rules and methods for daily operation, which is expected to jumpstart more projects in need of funding.

Alan Hall, founder of Grow America, a Utah-based organization focusing on growing companies, creating jobs and stimulating the economy, described crowdfunding as a vehicle that will allow average income people to become active investors without risking their "life savings."

Jed Cohen, seated, and Brian Meece,  founders of RocketHub,  speak at the Jed Cohen, seated, and Brian Meece, founders of RocketHub, speak at the "CrowdFunding Made Simple" conference at the University of Utah Guest House and Conference Center on Friday, June 1, 2012. (Laura Seitz, Laura Seitz, Deseret News)

The average guy or gal cannot participate in venture capital, Hall said.

"The (Securities and Exchange Commission) will not let someone who is not a sophisticated, credited investor put their money into (venture capital)," he said. "You have to have a couple of million dollars in net worth or you can't even play."

He said, "Crowdfunding will allow Grandma to take a little slice of her (funds) and take lets say about $2,000 and invest $200 across 10 companies," Hall said. "If you lose all of your $2,000, you're not upside down. But if one or two of those companies brought you a $20,000 return, then that's better than putting it under your mattress."

Hall said that crowdfunding is also a tool for entrepreneurs who may have a home-based lifestyle business or are self-employed who need a little help to grow their company.

He noted that currently in America there is no avenue for small investors to participate in venture capital or angel investing markets. Enactment of the JOBS Act will offer more regulated opportunities for the average person to invest in "the wealth environment" and for small business owners who could use a relatively modest infusion of funding to help grow their enterprise.

How successful crowdfunding will be is largely dependent on the rules developed by federal lawmakers to regulate this new industry.

Berkeley Geddes, chair of the Crowdfunding Professional Association, said besides aiding small business and entrepreneurs, enactment of JOBS Act could help institutions such as Utah's public universities raise capital to fund even more startup projects. In addition, the model could provide the boost to the national economy that many analysts have been waiting for.

"Crowdfunding is one of the most important principles on the horizon that could help America get back on with new businesses, jobs, employment and economic growth," Geddes said.

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