What is Crowdfunding?

What is Crowdfunding?

Crowdfunding is an approach to raising capital that seeks to raise funds from a large number of individuals. While most people might currently view crowdfunding as a novel approach to fundraising, the idea of pooling funds to finance projects or investments is not new. In fact, there were several cases of crowdfunded wars in history, as well as collective efforts to fund publications.

Crowdfund / Crowdfunding: The practice of funding a project or venture by raising many small amounts of money from a large number of people.

(Image: Igor Samoilik/Shutterstock)

History of Crowdfunding

Online crowdfunding as a new form of crowdfunding emerged in the late 90s, when musicians raised funds for their upcoming concert tours and albums. Considerable successes led to additional fundraising campaigns, which in turn led to the creation of the first online crowdfunding platforms.

The first widely popular crowdfunding platforms, such as Kickstarter and Indiegogo, focus on rewards-based and donation-based models. Such may entail the promise of products, discounts and/or exclusive access, in return for an upfront investment. These platforms mainly focus on the arts (such as music, fine art, design and creative writing), as well as social causes (e.g. education, animal protection, environmental protection, etc.)

The next step in the development of crowdfunding was the emergence of investment-based (or securities-based) crowdfunding. A security is a contract which is issued in exchange for some form of consideration which grant holders specific rights in a business.

Securities-based Crowdfunding

Debt-based crowdfunding emerged as an investment vehicle in the mid-2000s, allowing companies to borrow money from a large number of people, then paying back the creditors at a future date, with interest. Given the recent proliferation and relative success of the debt-based crowdfunding model, a natural progression towards an equity-based crowdfunding approach seems inevitable.

Equity crowdfunding is the process whereby large number of people invest into an unlisted company in exchange for shares (or other types of stock-based securities) in that company. An investor is then entitled to returns in the event where the company does well in its business operations. Traditionally, equity investment has been the privilege of venture capitalists and angel investors. However, such barriers to entry are slowly eroding due to the emergence of equity crowdfunding.

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