CROWDFUNDING

By Nikola Jonker


Research


Problem

Schools have to pay for the equipment they use.

Things changed after the American Civil Liberties Union sued the state in 2010, alleging that school districts illegally charged fees for educational activities and materials in violation of the right to a free and equal public education in California. As part of the settlement, a bill enacted in 2012 ensures public school students are not charged as a condition of participating in educational activities.

Schools are adjusting, but uniforms and equipment are getting more expensive.

All of their athletic programs have been instructed that there can be no mandatory fees for participation, but many schools do not have uniforms or equipment to give to student athletes.

Schools will have to use equipment for longer. When new equipment is purchased the most senior teams and players will get them first. This is a problem because the younger players and teams either don't get equipment or they get old or damaged equipment. The schools then have to purchase better quality equipment so that it lasts longer, which in turn calls for more expensive equipment.

The ACLU lawsuit followed an investigation by the organization that found what it called widespread practices among school districts of charging students for materials for academic courses and after-school activities. The suit contended that charging for educational essentials discriminates against lower-income children, resulting in an unfair system. If a student cannot afford equipment, the school has to pay for it (Shultz, 2016).

Impact

In the past athletes had to purchase "spirit packs" and members of the band paid annual fees for uniforms and travel. Now schools should have to pay for equipment used in contests.

Lake Elsinore Unified School District spokesman Mark Dennis said there are no specific uniform allocations for their three high schools. The district provides money to each campus for activities, but it is up to the site to purchase sports uniforms to meet the needs of the athletic program and student participants.

The change has impacted some areas more than others. The massive Los Angeles Unified School District, for example, earlier this month agreed to spend $9 million over the next three years to provide student-athletes with team uniforms in all sports across its 83 high schools. Daryl Strickland, a spokesman for LAUSD, said individual schools may have a voluntary donation program to purchase customized jerseys, pay for tournaments or purchase additional spirit gear, but none of these are required for participation on the team.

There shouldn't be any mandatory fees for participation, however, many schools did not have uniforms to issue to the student athletes. Teams will use sporting uniforms longer. New equipment will first go to the moat senior team and be passed down to younger players.

Students can still pay for additional items. For example, if a cheerleader wants her name on the back of her uniform, she can pay for it and keep it. But there also are uniforms available that remain at the school to be used year after year. Same as if a coach wants a team to have special warm-up gear or other items (Shultz, 2016).

Solution

A good solution to the problem (the lack of funding for school sports equipment) is crowdfunding.

Crowdfunding is about persuading individuals to each give you a small donation. The most common type of crowdfunding fundraising is using sites like Kickstarter and Indiegogo variety, where donations are sought in return for special rewards. That could mean free product or even a chance to be involved in designing the product or service.

It is also possible to use crowdfunding to assemble loans and royalty financing. The site LendingClub, for example, allows members to directly invest in and borrow from each other, with the claim that eliminating the banking middleman means "both sides can win" in the transactions. Royalty financing sites appear to be rarer, but the idea is to link business owners with investors who lend money for a guaranteed percentage of revenues for whatever the business is selling.

The holy grail is to sell company shares or ownership stakes in the company on crowdfunding sites, because it could be like a mini-IPO without the traditional hurdles. In the past, this has only been legal with accredited investors, people who each have more than $1 million in net worth or more than $200,000 in annual income.

The upside to crowdfunding is that it provides another strategy for start-ups or early stage companies ready to take it to the next level -- such as rolling out a product or service. Before, a business owner was subject to the caprices of individual angel investors or bank loan officers. Now it is possible to pitch a business plan to the masses. A successful crowdfunding round not only provides your business with needed cash, but creates a base of customers who feel as though they have a stake in the business' success.

The downside to crowdfunding is that if you don't have an engaging story to tell, then your crowdfunding bid could be a flop. Sites such as Kickstarter don't collect money until a fundraising goal is reached, so that's still a lot of wasted time that could have been spent doing other things to grow the business. It could be even worse if you meet your goal but then realize you underestimated how much money you needed. A business risks getting sued if it promises customers products or perks in return for donations, and then fails to deliver.

There is also an argument to be made that angel investors and even bank officers provide more than just money. They provide entrepreneurs with needed advice. Business owners miss out on such mentorship when they ignore traditional investors and turn to the crowd.

Here are more factors that can better ensure a successful crowdfunding campaign:

  • Have a network of friends and family willing to help get the ball rolling.
  • If you're giving out perks in return for money, make sure the perks are cool.
  • Present a serious business plan and an explanation of why the money will take your enterprise to the next level.
  • Demonstrate that you have your own skin in the game because of the personal funds you have already poured into the business.
  • Include a video pitch and keep it short and concise, with a call to action.
  • Give different rewards for different levels of giving.

Be prepared to essentially live online, staying active on social media sites, until the crowdfunding campaign is complete (Entrepreneur Network, 2018).

Investments or donations are usually made through online platforms, which then coordinate and administer the fundraising.

Projects will range from finance community-based projects for no financial return, to sophisticated portfolio-picking, purely for monetary gain.

There are three official types of crowd funding, namely donation crowdfunding (People invest simply because they believe in the cause. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project), debt crowdfunding (investors receive their money back with interest. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in) and equity crowdfunding (people invest in an opportunity in exchange for equity. Money is exchanged for a share in the business, project or venture. If it is successful, you get money but if it goes down and you could lose your money completely.)

Risks include losing your money. There is no guarantee of receiving any money back. Crowdfunding is regulated in many ways. Very similar rules apply to investment-based crowdfunding as loan-based - the marketing must be fair and not misleading, risks should be highlighted and systems must be in place to separate your money from theirs - and ensure there are adequate capital reserves.

The 14 day cooling off period and access to financial ombudsman also apply.

Aside from systems requirements, there are new rules on who is actually allowed to invest their money in crowdfunding. These include:

  • retail clients who are advised,
  • retail clients classified as corporate finance contacts or venture capital contacts,
  • retail clients certified as sophisticated or high net worth, or
  • retail clients who confirm that they will not invest more than 10 per cent of their net investible assets in these products.
Some tips for an individual:
  • Make sure you understand all the things a donation entails
  • Research tax breaks
  • Find out how money is protected in the business
  • Buy what you know
  • Consider lending money instead of donating
  • Do your research
Some tips for a business:
  • Your pitch is key
  • Do the work
  • Be engaging and personal
  • Be involved (and get your friends and family involved
  • Get your friends and family involved
  • At the end of the day your business should be better for it (Andrew, 2015).

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