10 THINGS YOU NEED TO KNOW ABOUT CROWD-FUNDING VS. PEER LENDING
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1. Peer-lending is a type of crowd-funding.
Crowd-funding is obtaining a source of funds from many individuals.
Peer-lending is when those funds are loaned in exchange for a debt security (a Note). The
lender earns interest and makes money on the Note.
2. Rewards-based crowd-funding = Taxable Revenue
Taxable revenue is money your business receives in exchange for providing a good or
service.When your crowd-funded campaign offers a reward of a good or service in exchange for
money, that money becomes taxable revenue.
3. Peer-lending is not taxable revenue.
Peer-lending is when you lend money to a business and take a legal Note in security. That
Note security is considered a liability to the business, like a loan, and the money received is on the balance sheet and therefore, not taxable
revenue.
4. Loans and equity are both eligible securities.
When a business offers “security” in exchange for money (either through debt or equity) both
are entitled to be crowd-funded under the Reg.D 506(c) exemption.
5. Your business doesn’t need to be incorporated.
Peer-lending (offering a debt security) can be done by any organized business, even a sole
proprietorship.Equity crowd-funding can only be done if you
are legally incorporated.
6. Your business will likely be funded by those you know.
Anecdotal evidence suggests that your customers, suppliers, friends and family are
your greatest source of new capital. Working with a third party intermediary can
smooth the way to completing a peer-lending transaction.
7. Community investment is awesome.
Local investment = investing in businesses that reinvest locally through employment, and
purchasing goods and services from other local businesses. That means there is more money to
keep your community strong and growing.
8. There are limits for non-accredited investors.
Today, only High-Net Worth “Accredited” investors can participate in crowd-funded and
peer-lending offerings from private businesses.A new regulation due out late this year will change that and everyone will be able to
participate.
9. Default rates are below 2%.
Every investment has risk. But industry rates of default with peer-loans are averaging 1.9%.
Which means that you are 98.1% likely to make more than 7% on each investment.
10. There is real paperwork involved.
Make no mistake. Equity crowd-funding and peer-lending are legal transactions. Always
consult with your lawyer and accountant before participating in crowd-funding for your business
capital needs.
Consumers invest & make money.Small businesses grow.Communities thrive.
Timely? Yes.Profitable? For everyone.
Invest in Main Street, not Wall Street.
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