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Compare three top cannabis crowdfunding sites
One of the few permitted ways to finance your cannabis startup — for now.
Cannabis businesses are in a tough spot. They’re part of a fast-growing industry with a lot of demand. But because of federal laws that prohibit funding these businesses, getting a standard business loan isn’t an option — at least not for now.
But business loans aren’t the only way to finance your new edibles shop. We take a look at one of the few ways you can legally fund your a cannabis business: crowdfunding.
Why should I consider crowdfunding for my cannabis business?
Crowdfunding is a way for businesses to raise funds from a large group of people, usually in exchange for rewards or a share of business ownership. It’s also one of the few options that cannabis businesses have to fund their ventures.
Why’s that? The US federal government still considers marijuana a Schedule I drug, meaning that any bank that works with cannabis-related businesses are at risk for prosecution.
It is legal, however, to invest up to $2,000 in small cannabis businesses in exchange for a portion of ownership. Cannabis companies can raise up to $1 million in this way. Crowdfunding essentially facilitates the process — though it’s not without its challenges.
Equity crowdfunding vs. regular crowdfunding
You might associate a website like Kickstarter with crowdfunding, but this model isn’t quite the same as equity crowdfunding. Kickstarter is a platform where backers get some form of reward, like a free product or early access to a service, for their contributions.
On the other hand, equity crowdfunding gives backers a piece of the company. In this way, backers become investors. Both regular and equity crowdfunding are legal. The latter is highly regulated by the SEC, and the former requires some careful planning when it comes to rewards to abide state laws.
Which should you use? It depends on your business plan and what you’re willing to give. When it comes to donation-based backing you’re building a potential customer base instead of gaining investors. You should also consider that regular crowdfunding requires reward tiers while equity relies on giving up a portion of your business.
Three cannabis crowdfunding platforms to consider
Interested in crowdfunding? Take a look at these three platforms that can help you raise funds for your pot-related shop.
This equity platform specializes in connecting startup cannabis businesses with investors around the world. It’s relatively free of risk and easy to use for businesses that deal with recreational and medical marijuana.
However, it only came to the market in 2017, so it doesn’t yet have a proven track record. And it isn’t free to use.
Launched in 2014, CannaFundr is practically a grandfather in this young industry. Like Fundanna, it’s an equity crowdfunding platform, connecting any cannabis-related business with anonymous investors.
You won’t pay a fee to use the site, but it’s difficult to navigate. And getting approved can take a while. Its security features also make it impossible to get feedback from investors or even browse other projects.
The crowdfunding platform 420fundme is rewards-based, meaning you give donors gifts rather than ownership of your business. But while the site is easy to navigate for both investors and companies, it’s already run into some roadblocks during its recent launch.
It’s also connected to the peer-to-peer investor platform Cannavstr and 420shindig, which helps businesses throw cannabis fundraising parties.
Private equity firms and venture capitalists
Crowdfunding is great for startups, but more established businesses might want to look at private investment or venture capitalists. While investors can’t give you more than $2,000 a head, they can be a lot easier to deal with. They’re also generally better equipped to deal with any legal problems that might arise.
Top three challenges you could face when crowdfunding
The legal gray area in which the cannabis industry works means that things are never simple. Here are some of the most common problems cannabis businesses run into with crowdfunding:
- You might need a bank account. It seems simple enough, but banks don’t like to work with cannabis businesses. This means that accessing funds is a lot more difficult that some lenders make it out to be.
- It’s hard for ordinary people to invest. Many cannabis crowdfunding sites aren’t open to the public — you have to sign up as an investor. This provides businesses with some legal cover, but it also means that ordinary people could have trouble contributing to — or even hearing about — your business.
- Platforms can have bank problems too. Crowdfunding platform 420fundme was shut down for 30 days after its bank decided not to work with them — even after it was preapproved for business. While you don’t necessarily stand to lose any money, it can make working with these platforms frustrating.
Five tips for a successful cannabis crowdfunding campaign
- Pay attention to your business plan. A business plan is the backbone of any crowdfunding campaign. Make sure it’s easy to understand, persuasive and — most important — sounds exciting.
- Invest in marketing. Investors might not be able to (or want to) get in touch with you, so your profile is all you have to work with. Many businesses hire marketing consultants to help with their cannabis crowdfunding campaigns.
- Read your crowdfunding site’s rules. Make sure you understand what you’re getting into — you don’t want to fail to raise the funds you need due to a technicality.
- Stay on top of regulations. Especially Securities and Exchange Commission rulings. The last thing you want is to be shut down for raising too much money. Consider hiring an SEC lawyer if keeping up is too much for you.
- Prepare for some slip-ups. Cannabis is a new industry, and its murky legality means that roadblocks are likely. Be prepared by exercising all of your financing options.
In mid-May of 2016, the Securities Exchange Commission (SEC) passed regulations on how cannabis crowdfunding functions. Before, you had to be a rather wealthy individual to invest in cannabis.
Under the new regulations, you can invest $2,000 per year as long as you receive stock in the company. A wealthy individual gets that limit raised to $100,000. It should be noted that this limit is on an accumulative basis and not per company invested in.
The other part of the regulation allows small cannabis business to receive up to $1,000,000 in crowdfunding each year through the method. It can require extensive filing with the SEC depending on how much you raise, and a bank account specifically for the funds received.
Want a loan instead? Compare lenders that can serve cannabis businesses
Is marijuana legal in my state?
Working in the cannabis industry is risky: You’re working in a legal gray area where nothing’s guaranteed. While crowdfunding can be difficult for cannabis businesses, it’s still one of the easiest over-the-table ways to get funding.
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