Sunday, June 22, 2014

Take What You Can Get, All Or None, and Taxes

Although the primary purpose of crowdfunding is to help project starters raise money from the crowd, it often provides its own funding procedures. For example, Kickstarter uses an “All or Nothing” method which allows project starters to receive the funds raised only if the crowdfunding campaign reaches it's goal. On the other hand, GoFundMe allows crowdfunding project sponsors to choose between receiving money only once they reach the goal amount or receiving every single contribution from every single backer. 
Choosing the right platform depends on the characteristic of the project, but people should aware of the tax issues that come with each method.
An "All or Nothing" (AON) strategy is the most frequently used in crowdfunding. This requires project starters set a funding goal prior to launching. They will be able to receive money only if they can confirm the success of the project. After this confirmation, the raised money is transferred to the project creator's bank account, with a fee deducted by the platform. At this point the money is in their pocket, which means the official transfer of money occurred from hand to hand. The project starters are now subject to income tax. Regardless of the project’s intent, unless they officially claimed status as a non-profit or they are an official non-profit organization, crowdfunding project revenue must be reported by the end of the financial year.
Differing from “All or Nothing”, "Take What You Can Get" (TWYCG) projects get every single contribution from the project backers. The funds are transferred as donations are made directly to the project creator’s bank account. Receiving every single contribution may sound great for those who are deeply concerning about the success of project. 
However, project starters must be aware of the money they have received. Since they are allowed to take any and all money given, project starters have to report this income to the government, even though they failed to reach their goal. Don’t forget FEDERAL income tax itself varies from 15% to 35% and will apply to every person.
For example, assume, at the end of December 2014, you are planning to start your crowdfunding project. You are aiming for the Christmas season so your project has to happen during the holiday season. You campaign will run from December 15th to January 15th. If you decide to receive every single contribution (TWYCG) instead of All or Nothing (AON), you will be subject to taxes for both 2014 and 2015 year because the funds raised will be received in January 2015, and must be added to donations earned in 2014. This is not an issue with AON, since funds will not be received until January, 2015.
People who are planning to start crowdfunding should carefully analyze their project strategy with an eye to possible tax issues and consider taxes a major part of project expenses when creating a crowdfunding financial plan.  Don’t forget - choosing a funding method may benefit or harm your entire project.

Post by:
Hanna Kim, University at Buffalo, The State University of New York, May 2015
Bachelor of Science in Accounting
Edited by William Michael Cunningham

How Crowdfunding Solves Business Problems

The items below are from an article on what causes small business failures. I have repurposed it to show how crowdfunding addresses these issues and how we use these factors in evaluating potential crowdfunding campaigns.

"Inadequate Financing"

Clearly, crowdfunding addresses this issue.

"Amount of Effort Exerted: The single most important factor in determining who succeeds and who doesn't is simply the amount of effort exerted. If you aren't ready and willing to work - and work hard - being an entrepreneur is probably not for you."

While we don't believe that effort expended is the single most important factor, crowdfunding is hard. If you will not work hard on it, and work smart, then you will not do well.

"Lack of Planning: Another fact rarely considered is that the majority of new businesses fail within a few years mostly due simply to poor planning or no planning at all."

You have to plan your crowdfunding campaign. As noted above, it is hard work, but it will help in planning your overall business strategy. 

"Inability to Commit: Even though most people would like to start their own business, only a small percentage actually do it. When push comes to shove, most lack the self-confidence to make a decision and act on it. In order for the business to succeed, they must be able to gather information, weigh the facts and then make a prompt decision."

You must do all of this in creating, launching and managing a crowdfunding campaign.

"Unrealistic Expectations: Many individuals assume not only that most businesses succeed, but that they're lucrative from the get-go. This is definitely not the case."

The results of your crowdfunding campaign helps set expectations, with feedback directly from the marketplace.  

"Unwillingness to Take Responsibility: A business owner is 100 percent responsible for his or her mistakes. There's always a risk of a business failure or less-than-expected financial return. If that should happen to you, you can't blame it on someone else."

Same thing with a crowdfunding campaign. It's all you, even if you have a team or consultants. 

Summary

We reject many potential crowdfunders because they are not willing to work hard, have unrealistic expectations, cannot fully commit to the campaign (and the time/effort it will take), have not done the planning, are unwilling to do the planning, and seem like they are looking for someone to pin the blame on if they fail. Our answer: Thank you, but, not us.

Saturday, June 21, 2014

Crowdfunding and Taxes

If you are raising money via crowdfunding, do you need to pay taxes? The tricky question is how do you define income from a crowdfunding campaign? You might try to define income as a donation in order to avoid paying taxes. Unfortunately, I don't think this works.
Any money derived from an investment effort leading to the delivery of a commercial product is typically taxable, since Federal and State entities see this revenue as ‘income.’ As a result, any ‘project’ in this category is going to be levied at prevailing tax rates, whether it is offered as art, technology, or manufactured goods. No matter you want to manufacture a bike, make a movie, or create a video game, you need to pay taxes. The only exception is Non-Profit (NP) or Non-Government Organization (NGO), and you need to get recognition from the IRS for these.
Of course, taxes are based on income. The cost of reward fulfillment can be considered an expense. My suggestion is to recognize the cost of reward fulfillment early in your campaign. Your tax liability will be lower as a result. Keep in mind that online funding raise is a gray area; you may not be able to provide all expense and income receipts as a normal company would. I suggest you ask a friend who is a CPA to help you recognize as much of the cost of the crowdfunding campaign as possible. 
Below is an interview with a woman who has already done crowdfunding:1
Q: Are the donations tax-free income?”
A: This is a good question mostly because of the way it’s worded.”
The answer: no. all the money I’m making on CD and LP (and book, and everything) sales via Kickstarter is taxable.”
These aren't DONATIONS. That drives me crazy. the way we generally define ‘donating’ is that you are giving something without any return: it’s a selfless, one-way gift to a cause. This is not that. Every single person who’s backed the Kickstarter is getting a product or a service (like a show) that they’ve paid for.”
It’s more of a 'pre-order' than a 'fundraiser.' The language here gets important. It makes me cringe to read in the press that people have “donated $600k to Amanda Palmer’s Kickstarter (campaign).” That makes it seem like I’m getting away like a bandit. As you can see above have to PAY for and manufacture (and pay the staff to help me create) all the products that are for sale.”

1 Resource: Rick Calton, Taxes and Crowd funding: Paying The Government To Dream?, Crowd funding News, Sep 17, 2013, http://www.crowdfundingguide.com/taxes-and-crowdfunding-paying-the-government-to-dream/
Post by:
Ziqi Chen, Master of Science in Finance, August, 2014
Johns Hopkins University Carey Business School 
NCS Intern, Summer 2014

Sunday, June 15, 2014

Crowdfunding Accounting 101 - Revenue Recognition in Crowdfunding

A start-up using crowd funding to create a product is different from a normal company. The start-up has cash inflows from donations but does not have a product, yet. In this situation, we recommend using completed-contract method to recognize revenue.
Under this way of thinking, we assume the start-up is akin to a project or a long-term contract. The crowdfunding company will find it difficult to estimate the revenue from crowdfunders and, hence, the cost of rewards or perks. Under International Financial Reporting Standards (IFRS) and GAAP guidelines, if the firm cannot reliably measure the outcome of the project, revenue should be recognized based on contract costs. These costs should be expensed when incurred. Profit is recognized only at the completion of the project.
In summary, for crowdfunding companies, revenue, expense, and profit are recognized only when the crowdfunded product is actually manufactured.1
For example, assume that AAA Corp. wants to manufacture bicycles and is seeking a crowdfunding from community to do so. AAA can’t estimate the outcome of crowdfunding and, as a result, cannot tell how many bicycles they will manufacture. Assume AAA will manufacture it's first bike in August, and we are now in June. f the number of units created cannot be reliably estimated, revenue should be recognized only to the extent that costs are incurred in the following period.
AAA Crowdfunding Income Statement

June
July
Aug
Total
Revenue from crowdfunding
$400
$300
$300
$1,000
Expense
$400
$300
$100
$800
Net Income
$0
$0
$200
$200

1 CFA, Financial Reporting and Analysis, 2012

Post by:
Ziqi Chen, Master of Science in Finance, August, 2014
Johns Hopkins University Carey Business School 
NCS Intern, Summer 2014

Friday, June 13, 2014

Wednesday, June 11, 2014

Eric Cantor and the improved outlook for Crowdfunding

The election results from Eric Cantor's district are welcome news for crowdfunding advocates. Mr. Cantor's defeat affects crowdfunding in several ways.

First, the race is on for a new chairman of the House Financial Services committee. This is critical, given the delay in the implementation of the JOBS Act. One of the candidates for the Chair is Patrick McHenry, the author of the JOBS Act.

Secondly, Mr. McHenry has another bill in the House, HR 4565, that will raise the crowdfunding limit from $1 million to $5 million. The election makes it more likely that this bill will get out of committee, to the full House and onto the Senate.

Finally, Mr. Cantor was, according to Politico, a key Wall Street ally, and we know Wall Street is not happy with the potential crowdfunding has to loosen their stranglehold on start-up financing. "Many lobbyists on K Street whose clients include major financial institutions consider Cantor a go to member in leadership on policy debates, including overhauling the mortgage finance market, extending the government backstop for terrorism insurance, how Wall Street should be taxed and flood insurance." Add delaying the implementation of the JOBS Act to that list.

We will, of course, have to wait and see, but we are betting this is positive news for crowdfunding.



Tuesday, June 10, 2014

$1 million in 52 hours!

According to Indiegogo, "Lazer Team by Rooster Teeth" raised $1 million in 52 hours from 14,000+ fans/contributors. What makes this campaign special?

1. Prelaunch. "Rooster Teeth is making its first feature length movie..." and, given that they raised this much cash in a very short period, they spent some time preparing their prelaunch activities.

2. Track record. They are an online video company and had valuable online community building experience from past projects:

"Red vs Blue, the web's longest running series
Achievement Hunter, a group of charismatic gaming scamps
The RT Podcast, focusing on current events and accurate science
RWBY, the world's newest anime sensation."

It is this experience which set the stage for their success. As they said on their campaign page:

"We have always made the most of our resources and made some of the best quality content on the Internet over the past 11 years. We are going to do this on a bigger scale."

We have done what we are asking you money for. 

"We have the infrastructure to produce the content, the funds we are raising are for production and production quality. That means most of the dollars will end up on the screen, which is exactly where you want them."

We CAN do what we are asking you money for. 

"Rooster Teeth is uniquely qualified to move from web content to feature film-making. Over the course of the last decade we have grown into some of the biggest productions the internet has ever seen and we want you to be a part of this next step!"

WE SHOULD DO WHAT WE ARE ASKING YOU MONEY FOR.

Clear?

3. Reasonable goal. They sought $600,000.

4. Reasonable perks, ranging from $5 to $10,000. Many of the high level perks sold out quickly.

For more, see: http://go.indiegogo.com/blog/2014/06/essential-tips-for-running-an-indiegogo-campaign-part-i.html

Wednesday, June 4, 2014

The Average Crowdfunding Campaign Raised $18,231.77 on Kickstarter

Total raised on Kickstarter:
$1,149,549,280


Number of successful campaigns:
63,052

Average
dollar amt:$18,231.77


Total raised on Kickstarter:
$1,149,549,280

Number of supporters:
6,329,762




Average
amt per supporter:
$181.61

Total raised on Kickstarter:
$1,149,549,280
Number of pledges:
15,626,785



Average
amt per pledge:
$73.56

Tuesday, June 3, 2014

Crowdfunding heads to Georgetown


So first Fundrise raises $31Million for real estate crowdfunding.  Now Realty Mogul, a real estate crowdfunding platform, responds quickly with a rare opportunity to be a part of a $31.8 million project in the exclusive Georgetown neighborhood of Washington DC. #crowdfundrealestate

Realty Mogul, along with JOSS Realty Partners ("JOSS"), is introducing the Georgetown Plaza to the crowdfunding world. This 150,097 square foot Class B office building is located on Wisconsin Avenue, Washington DC's major north-south artery and half a mile north of Georgetown University's main campus and Georgetown University Hospital.

The primary objective of this investment crowdfunding campaign is to acquire, lease-up, and reposition the office building before reselling.
In this crowdfunding transaction, Realty Mogul investors will hold a partnership equity stake in Realty Mogul 19, LLC.   Realty Mogul 19, LLC will subsequently invest in 2233 Wisconsin NY Member LLC, the entity that will hold the title to Georgetown Plaza. #crowdfundrealestate

Monday, June 2, 2014

LeVar Burton Shows How To Crowdfund

We note with interest the recent Kickstarter campaign by LeVar Burton for Reading Rainbow. According to one news report, "Reading Rainbow, the PBS children’s program hosted by LeVar Burton that debuted in 1983 and went off the air in 2006,upset many with its departure. But Burton, who also executive produced the program, has managed to keep the project alive in some form or another in the time since. He launched the show as an app in 2012. And now his new venture is to take Reading Rainbow’s large digital library of books and videos to classrooms nationwide for free. But to do so Burton needs capital. So the Star Trek actor turned to Kickstarter to raise money. He launched his campaign last Wednesday to raise $1 million to launch his PBS children’s series online. Although Burton had allotted 35 days to raise the money, within 24 hours he had reached his goal."

Bravo! Why was this campaign so successful?
  • Well, it linked to two well known media properties, Reading Rainbow and Star Trek. 
  • The fact that Reading Rainbow was cancelled in 2006 and that Mr. Burton did not wait until now to try to relaunch, but had developed several successful products in the interim also worked in this campaign's favor.
  • His campaign was certainly socially responsible, with high social impact, focusing on an area of recognized need - education. 
  • He also had justification for a large crowdfunding goal. It other words, to do what he wanted to do, it will take at least a million. 
  • He had the name recognition required to generate initial curiosity, which, given the high quality of what he was offering, quickly turned into participation. 
  • He structured the rewards correctly, with an ultimate gift of some interest: a chance to wear Geordi's Visor at a dinner with Mr. Burton. Wow! It did not matter if anyone purchased the thing: that fact that it was offered at all showed Mr. Burton was all in. 
Let's look at his reward table:
NOTE: The campaign has multiple rewards at the same dollar level, so the table is not exact. Data as of June 2, 2014.
    For those of you considering crowdfunding, here are the key takeaways:

    A. You have a fan base. It is just not large enough to generate a million dollars in a day.
    B. Your fan base may, however, generate $1,000 in a day.
    C. If your crowdfunding goal is $1,000, then you are there.
    D. For your fan base, you also have something in your possession that will prove to them that you are all in. Think of what this might be and offer it (or a chance to posses it, if only temporarily.)
    E. Set a reasonable monetary goal, relative to what you are trying to do.
    F. Your entire campaign should be about something people can't get anywhere else, at any price.
    G. It should be for something that makes life better for someone else.