What is CrowdFunding?

Aug. 2, 2018

Crowdfunding is a form of financing which aims to raise funds from not a single, but multiple people for the purpose of funding a project or business venture, usually via the Internet. Crowdfunding is not like any other traditional fundraising methods. Instead, they are a financial innovation, a part of the fast-growing FinTech around the world. It is part of a category named alternative finance (AltFi), which is a technology-enabled market-based funding outside the traditional financial systems (Jenik, Lyman & Nava, 2017)

Crowdfunding platforms pave the way for future entrepreneurs and make the process of raising funds for their project or business venture more efficient. Crowdfunding also encourages early adopters - investors who invest in a project or business venture earlier than the rest, and brand advocates. Investors who believe in the brand will prove to be valuable advocates to help propel the brand further than traditional fundraising methods such as grant writing.

Drawing on the wisdom of the crowd, crowdfunding allows one to make continuous improvements to his or her project or business venture. Feedback is common and valuable in the process, as they are opinions from the project’s or business venture’s main audience or investors. Since appearing on the radar, there has been a growth of US$1.5 billion in 2011 to US$100 billion in 2015 worldwide (Jenik, Lyman & Nava, 2017), which is an extremely positive growth trend.

A type of crowdfunding is Equity Crowdfunding. Equity crowdfunding allows investors to invest in Issuers for shares in their company (also known as equity). Equity Crowdfunding has several models, namely the club model (where crowdfunding platforms engage potential investors to become members of a private club to avoid public offerings); the cooperative model (where crowdfunding platforms design special-purpose cooperative vehicles to pool together money to invest in a single project or business venture); the investor-led model (where an investor goes through due diligence and invests, inviting the ‘crowd’ to follow suit and invest in the same project or business venture) and the co-investment model (where investors are allowed to invest alongside venture capitalists). (Gabison, 2015)

This form of financing is efficient for both the Issuers and the investors. For the Issuers, they will only have limited financial liability and a much wider reach because of how Equity Crowdfunding functions on the Internet. For investors, there more opportunities to invest and investing has never been easier as investment opportunities are no longer available to seasoned investors or venture capitalists.

There are regulations in place regarding Equity Crowdfunding and regulations vary in every country. Examples of such regulations are the Securities and Exchange Act. As such, one should always read up and understand the different crowdfunding regulations that govern the respective countries before investing.

References

Gabison, G. A. 2015. Understanding Crowdfunding and Its Regulations. Brussels: EuropeanCommission.

http://publications.jrc.ec .europa.eu/repository/bitstream/JRC92482/lbna26992enn.pdf

Jenik, I., Lyman, T. & Nava, A. 2017. Crowdfunding and Financial Inclusion. CGAP.

https://www.cgap.org/sites/defaul/files/Working-Paper-Crowdfunding-and-Financial-Inclusion-Mar2017.pdf