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How can you use the money if you crowdfund a business?

On Behalf of | Oct 18, 2022 | Business Formation |

Crowdfunding is one way that business owners sometimes get their company off of the ground. This often happens when they have a good idea or they’ve even invented a product, but they simply don’t have the financial backing to put it into production.

For example, a company may come up with an idea for a groundbreaking new technology, and they know that people are going to want the product. But they don’t have enough money to produce 10,000 units and then try to sell them.

What they’ll do instead is pitch the item on a crowdfunding platform, telling people that they will get it once it’s in production if they back that project. The only way for the product to exist is through crowdfunding, so people will get excited and put their name on the list to receive the product months down the line. They will usually get it at a discount as a reward for backing early.

But if you do this and you get a substantial amount of money, are there any restrictions on how you use it?

It may depend on the platform that you use

The real question here is what platform you use, how it is set up and what your campaign looks like. The focus of that campaign could be very different from one company to the next.

For example, some platforms allow donation-based giving that just generally supports a business or nonprofit. If you do this, you don’t have to provide any sort of product and service in return, and you can use the money as you see fit.

But many platforms use a reward-based system, as noted above. The person is essentially purchasing the product in advance, giving you the money to create that product and then sell it back to them. So you have to use the money for the business itself, because you have an obligation to produce the products you promised your investors when they funded your campaign.

This is just one way to fund a new business, and it’s important to know all of the legal options you have and the steps you’ll need to take to set up your new company.