History
Crowdfunding has a long history with many roots. Books have been crowdfunded for centuries; authors and publishers would advertise book projects in praenumeration or subscription schemes. The book would be written and published if enough subscribers signaled their readiness to buy the book once it was out. TheTypes
The Crowdfunding Centre's May 2014 report identified two primary types of crowdfunding: # Rewards crowdfunding, in which entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares. # Equity crowdfunding, in which the backer receives shares of a company, usually in its early stages, in exchange for the money pledged.Reward-based
Reward-based crowdfunding has been used for a wide range of purposes, including album recording and motion-picture promotion,Equity
Equity crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity. In the United States, legislation that is mentioned in the 2012 JOBS Act will allow for a wider pool of small investors with fewer restrictions following the implementation of the act. Unlike non-equity crowdfunding, equity crowdfunding contains heightened "information asymmetries." The creator must not only produce the product for which they are raising capital, but also create equity through the construction of a company. Equity crowdfunding, unlike donation and rewards-based crowdfunding, involves the offer of securities which include the potential for a return on investment. Syndicates, which involve many investors following the strategy of a single lead investor, can be effective in reducing information asymmetry and in avoiding the outcome of market failure associated with equity crowdfunding.Digital security
Another kind of crowdfunding is to raise funds for a project where a digital security is offered as a reward to funders which is known as Initial coin offering (abbreviated to ICO). Value tokens are endogenously created by particular open decentralized networks that are used to incentivize client computers of the network to expend scarce computer resources on maintaining the protocol network. These value tokens may or may not exist at the time of the crowdsale, and may require substantial development effort and eventual software release before the token is live and establishes a market value. Although funds may be raised simply for the value token itself, funds raised onDebt-based
Debt-based crowdfunding, (also known as "peer-to-peer", "P2P", "marketplace lending", or "crowdlending") arose with the founding of Zopa in the UK in 2005Ian Fraser for Unquoted. May 1, 201Litigation
Litigation crowdfunding allows plaintiffs or defendants to reach out to hundreds of their peers simultaneously in a semi-private and confidential manner to obtain funding, either seeking donations or providing a reward in return for funding. It also allows investors to purchase a stake in a claim they have funded, which may allow them to get back more than their investment if the case succeeds (the reward is based on the compensation received by the litigant at the end of his or her case, known as a contingent fee in the United States, a success fee in the United Kingdom, or a ''pactum de quota litis'' in many civil law systems).Donation-based
Running alongside reward-based crowdfunding, donation-based is second another popular form of crowdfunding. Donation-based crowdfunding is the collective effort of individuals to help charitable causes. In donation-based crowdfunding, funds are raised for religious, social environmental, or other purposes. Donors come together to create an online community around a common cause to help fund services and programs to combat a variety of issues including healthcare and community development. The major aspect of donor-based crowdfunding is that there is no reward for donating; rather, it is based on the donor's altruistic reasoning. Ethical concerns have been raised to the increasing popularity of donation-based crowdfunding, which can be affected by fraudulent campaigns and privacy issues.Role
The inputs of the individuals in the crowd trigger the crowdfunding process and influence the ultimate value of the offerings or outcomes of the process. Individuals act as agents of the offering, selecting, and promoting of the projects in which they believe. They sometimes play a donor role oriented towards providing help on social projects. In some cases, they become shareholders and contribute to the development and growth of the offering. Individuals disseminate information about projects they support in their online communities, generating further support (promoters). The motivation for consumer participation stems from the feeling of being at least partly responsible for the success of others people's initiatives (desire for patronage), striving to be a part of a communal social initiative (desire for social participation), and seeking a payoff from monetary contributions (desire for investment). Additionally, individuals participate in crowdfunding to see new products before the public. Early access often allows funders to participate more directly in the development of the product. Crowdfunding is also particularly attractive to funders who are family and friends of a creator. It helps to mediate the terms of their financial agreement and manage each group's expectations for the project. An individual who takes part in crowdfunding initiatives tends to have several distinct traits – innovative orientation, which stimulates the desire to try new modes of interacting with firms and other consumers; social identification with the content, cause, or project selected for funding, which sparks the desire to be a part of the initiative; and (monetary) exploitation, which motivates the individual to participate by expecting a payoff. Crowdfunding platforms are motivated to generate income by drawing worthwhile projects and generous funders. These sites also seek widespread public attention for their projects and platform. Crowdfunding websites helped companies and individuals worldwide raise US$89 million from members of the public in 2010, $1.47 billion in 2011, and $2.66 billion in 2012 — $1.6 billion of the 2012 amount was raised in North America.Global Crowdfunding Volumes Rise 81% In 2012Platforms
In 2015, it was predicted that over 2,000 crowdfunding sites would be available to choose from 2016. As of 2021, there are 1,478 crowdfunding organizations in the US ( Crunchbase, 2021). Currently, the three largest crowdfunding platforms are Kickstarter, Indiegogo, and Crowd Supply. As of January 2021, Kickstarter has raised more than $5.6 billion spread over 197,425 projects. Crowdfunding platforms have differences in the services they provide and the type of projects they support. Curated crowdfunding platforms serve as "network orchestrators" by curating the offerings that are allowed on the platform. They create the necessary organizational systems and conditions for resource integration among other players to take place. Relational mediators act as an intermediary between supply and demand. They replace traditional intermediaries (such as traditional record companies, venture capitalists). These platforms link new artists, designers, project initiators with committed supporters who believe in the persons behind the projects strongly enough to provide monetary support. Growth engines focus on the strong inclusion of investors. They "disintermediate" by eliminating the activity of a service provider previously involved in the network. The platforms that use crowdfunding to seek stakes from a community of high net-worth private investors and match them directly with project initiators.Significant campaigns
Crowdfunding for Statue of Liberty
In the summer of 1885, crowdfunding averted a crisis that threatened the completion of the Statue of Liberty. Construction of the statue's pedestal stalled due to a lack of financing. Fundraising efforts for the project fell short of the necessary amount by more than a third. New York GovernorEarly campaigns
Marillion started crowdfunding in 1997. Fans of the British rock band raised $60,000 (£39,000) via the internet to help finance a North American tour. The Professional Contractors Group, a trade body representing freelancers in the UK, raised £100,000 over a two-week period in 1999 from some 2000 freelancers threatened by a government measure known as IR35. In 2003, jazz composer Maria Schneider (musician) launched the first crowdfunding campaign on ArtistShare for a new recording. The recording was funded by her fans and became the first recording in history to win aHighest-grossing campaigns
As of late 2022, the highest reported funding by a crowdfunded project to date is '' Star Citizen'', an onlineKickstarter campaigns
On April 17, 2014, ''The Guardian'' media outlet published a list of "20 of the most significant projects" launched on the Kickstarter platform prior to the date of publication, including: Musician Amanda Palmer raised US$1.2 million from 24,883 backers in June 2012 to make a new album and art book. Other campaigns include: *The " Coolest Cooler" raised a total of $13,285,226 from 62,642 backers in July 2014 in a campaign run by Funded Today. The cooler features a blender, waterproof Bluetooth speakers and an LED light. *Zack Brown raised $55,000 from over 6,900 backers in September 2014 to make a bowl of potato salad. Noteworthy is that his initial goal was only $10, but his campaign went viral and got a lot of attention. Brown ended up throwing a potato salad party with over 3,000 pounds of potatoes. *Actor and director Zach Braff raised more than $3 million via a Kickstarter campaign to fund his 2014 movie Wish I Was Here Kickstarter has been used to successfully revive or launch television and film projects that could not get funding elsewhere. These are the current record holders for projects in the "film" category: # Critical Role raised a total of $11,385,449 with 88,887 backers in April 2019 to make an animated TV show based on their Twitch live-streamed Dungeons & Dragons game. Not only did the campaign exceed the $750,000 goal, but the campaign also broke the Kickstarter record for most money raised for projects in the "film" category. # '' Mystery Science Theater 3000'' raised a total of $5,764,229 with 48,270 backers in December 2015 to create 14 episodes of the new series, including a holiday special. # '' Veronica Mars'' raised a total of $5,702,153 with 91,585 backers in March 2013 to create a film set 9 years after the end of the TV show. In the campaign's first 12 hours of existence, it became the fastest Kickstarter campaign to reach both $1 million and $2 million and it held onto the record of highest in the "film" category until ''Mystery Science Theater 3000'' beat it in 2015.Third parties
A number of private companies thrive off of crowdfunding and offer services related to a number of platforms. Examples include large companies like Backerkit that principally offer data analysis of campaigns, or Y Combinator, which acts as a startup accelerator and receives a significant number of its applicants from platforms such as Kickstarter and Indiegogo. The Italian-American company Atellani USA was originally founded with the intent to market, accelerate, and invest in startups wanting to publicize their ideas via crowdfunding platforms like Kickstarter, often designing the startup's campaign and online material.Applications
Crowdfunding is being explored as a potential funding mechanism for creative work such as blogging and journalism, music, independent film (see crowdfunded film), and for funding startup companies.Crowdfunding Rules Could Create Mini-Disclosure RegimePhilanthropy and civic projects
A variety of crowdfunding platforms have emerged to allow ordinary web users to support specific philanthropic projects without the need for large amounts of money. GlobalGiving allows individuals to browse through a selection of small projects proposed by nonprofit organizations worldwide, donating funds to projects of their choice. Microcredit crowdfunding platforms such as Kiva (organization) facilitate crowdfunding of loans managed by microcredit organizations in developing countries. The US-based nonprofit Zidisha applies a directReal estate
Real estate crowdfunding is the online pooling of capital from investors to fund mortgages secured by real estate, such as " fix and flip" redevelopment of distressed or abandoned properties, equity for commercial and residential projects, acquisition of pools of distressed mortgages, home buyer down payments, and similar real estate related outlets. Investment, via specialized online platforms in the US, is generally completed under Title II of the JOBS Act and is limited to accredited investors. The platforms offer low minimum investments, often $100 – $10,000. There are over 75 real estate crowdfunding platforms in the United States. The growth of real estate crowdfunding is a global trend. During 2014 and 2015, more than 150 platforms have been created throughout the world, such as in China, the Middle East, or France. In Europe, some compare this growing industry to that of e-commerce ten years ago. Examples of real estate crowdfunding platforms are EquityMultiple, Fundrise, Yieldstreet, and RealtyMogul. In Europe, the requirements towards investors are not as high as in the United States, lowering the entry barrier into the real estate investments in general. Real estate crowdfunding can include various project types from commercial to residential developments, planning gain opportunities, build to hold (such as social housing), and many more. The report from Cambridge Centre for Alternative Finance addresses both real estate crowdfunding and ''peer 2 peer'' lending (property) in the UK.Intellectual property exposure
One of the challenges of posting new ideas on crowdfunding sites is there may be little or no intellectual property (IP) protection provided by the sites themselves. Once an idea is posted, it can be copied. As Slava Rubin, founder of IndieGoGo, said: "We get asked that all the time, 'How do you protect me from someone stealing my idea?' We're not liable for any of that stuff." Inventor advocates, such as Simon Brown, founder of the UK-based United Innovation Association, counsel that ideas can be protected on crowdfunding sites through early filing of patent applications, use ofScience
A number of platforms have also emerged that specialize in the crowdfunding of scientific projects, such as experiment.com, and The Open Source Science Project. In the scientific community, these new options for research funding are seen ambivalently. Advocates of crowdfunding for science emphasize that it allows early-career scientists to apply for their own projects early on, that it forces scientists to communicate clearly and comprehensively to a broader public, that it may alleviate problems of the established funding systems which are seen to fund conventional, mainstream projects, and that it gives the public a say in science funding. In turn, critics are worried about quality control on crowdfunding platforms. If non-scientists were allowed to make funding decisions, it would be more likely that "panda bear science" is funded, i.e. research with broad appeal but lacking scientific substance. Initial studies found that crowdfunding is used within science, mostly by young researchers to fund small parts of their projects, and with high success rates. At the same time, funding success seems to be strongly influenced by non-scientific factors like humor, visualizations, or the ease and security of payment.Journalism
In order to fund online and print publications, journalists are enlisting the help of crowdfunding. Crowdfunding allows for small start-ups and individual journalists to fund their work without the institutional help of major public broadcasters. Stories are publicly pitched using crowdfunding platforms such as Kickstarter, Indiegogo, or Spot.us. The funds collected from crowdsourcing may be put toward travel expenses or purchasing equipment. Crowdfunding in journalism may also be viewed as a way to allow audiences to participate in news production and in creating aInternational development
There is some hope that crowdfunding has potential as a tool open for use by groups of people traditionally more marginalized. The World Bank published a report titled "Crowdfunding's Potential for the Developing World" which states that "While crowdfunding is still largely a developed world phenomenon, with the support of governments and development organizations it could become a useful tool in the developing world as well. Substantial reservoirs of entrepreneurial talent, activity, and capital lay dormant in many emerging economies ... Crowdfunding and crowdfund investing have several important roles to play in the developing world's entrepreneurial and venture finance ecosystem."Legal developments
As the popularity of crowdfunding expanded, the SEC, state governments, and Congress responded by enacting and refining many capital-raising exemptions to allow easier access to alternative funding sources. Initially, the Securities Act of 1933 banned companies from soliciting capital from the general public for private offerings. However, "President Obama signed the Jumpstart Our Small Businesses Act ('JOBS Act') into law on April 5, 2012, which removed the ban on general solicitation activities for issuers qualifying under a new exemption called 'Rule 506(c). A company can now broadly solicit and generally advertise an offering and still be compliant with the exemption's requirements if: * The investors in the offering are all accredited investors; and * The company takes reasonable steps to verify that the investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like. Another change was the amendment of SEC Rule 147. Section 3(a)(11) of the Securities Act allows for unlimited capital raising from investors in a single state through an intrastate exemption. However, the SEC created Rule 147 with a number of requirements to ensure compliance. For example, the intrastate solicitation was allowed, but a single out-of-state offer could destroy the exemption. Additionally, the issuer was required to be incorporated and do business in the same state of the intrastate offering. With the expansion of interstate business activities because of the internet, it became difficult for businesses to comply with the exemption. Therefore, on October 26, 2016, the SEC adopted Rule 147(a) which removed many of the restrictions to modernize the Rules. For example, companies would have to do business and have its principal place of business in the state where the offering is sold, and not necessarily where ''offered'' per the prior rule.Benefits and risks
Benefits for the creator
Crowdfunding campaigns provide producers with several benefits, beyond the strict financial gains. The following are the non-financial benefits of crowdfunding. * Profile – a compelling project can raise a producer's profile and provide a boost to their reputation. * Marketing – project initiators can show there is an audience and market for their project. In the case of an unsuccessful campaign, it provides good market feedback. It also has a signal value: observing consumers, consumers who are not involved with original crowdfunding campaign, show a strong preference for crowdfunded products compared to those funded with alternative means * Audience engagement – crowdfunding creates a forum where project initiators can engage with their audiences. An audience can engage in the production process by the following progress through updates from the creators and sharing feedback via comment features on the project's crowdfunding page. * Feedback – offering pre-release access to content or the opportunity to beta-test content to project backers as a part of the funding incentives provides the project initiators with instant access to good market testing feedback. There are also financial benefits to the creator. For one, crowdfunding allows creators to attain low-cost capital. Traditionally, a creator would need to look at "personal savings, home equity loans, personal credit cards, friends and family members, angel investors, and venture capitalists." With crowdfunding, creators can find funders from around the world, sell both their product and equity, and benefit from increased information flow. Additionally, crowdfunding that supports pre-buying allows creators to obtain early feedback on the product. Another potential positive effect is the propensity of groups to "produce an accurate aggregate prediction" about market outcomes as identified by the author James Surowiecki in his book '' The Wisdom of Crowds'', thereby placing financial backing behind ventures likely to succeed. Proponents also identify a potential outcome of crowdfunding as an exponential increase in available venture capital. One report claims that if every American family gave one percent of their investable assets to crowdfunding, $300 billion (a 10X increase) would come into venture capital. Proponents also cite that a benefit for companies receiving crowdfunding support is that they retain control of their operations, as voting rights are not conveyed along with ownership when crowdfunding. As part of his response to the Amanda Palmer Kickstarter controversy, Steve Albini expressed his supportive views of crowdfunding for musicians, explaining: "I've said many times that I think they're part of the new way bands and their audience interact and they can be a fantastic resource, enabling bands to do things essentially in cooperation with their audience." Albini described the concept of crowdfunding as "pretty amazing".Risks and barriers for the creator
Crowdfunding, while gaining popularity, also comes with a number of potential risks or barriers. For the creator, as well as the investor, studies show that crowdfunding contains "high levels of risk, uncertainty, and information asymmetry." * Reputation – failure to meet campaign goals or to generate interest results in a public failure. Reaching financial goals and successfully gathering substantial public support but being unable to deliver on a project for some reason can severely negatively impact one's reputation. * Intellectual property (IP) protection – many Interactive Digital Media developers and content producers are reluctant to publicly announce the details of a project before production due to concerns about idea theft and protecting their IP from plagiarism. Creators who engage in crowdfunding are required to release their product to the public in early stages of funding and development, exposing themselves to the risk of copy by competitors. * Donor exhaustion – there is a risk that if the same network of supporters is reached out to multiple times, that network will eventually cease to supply necessary support. * Public fear of abuse – concern among supporters that without a regulatory framework, the likelihood of a scam or an abuse of funds is high. The concern may become a barrier to public engagement. * Lack of participation – It is seen that some stories are more likely to get picked up than others based on the story. It is easy to get support if you "just tell a story." For crowdfunding of equity stock purchases, there is some research in social psychology that indicates that, like in all investments, people don't always do their due diligence to determine if it is a sound investment before investing, which leads to making investment decisions based on emotion rather than financial logic. By using crowdfunding, creators also forgo potential support and value that a single angel investor or venture capitalist might offer. Likewise, crowdfunding requires that creators manage their investors. This can be time-consuming and financially burdensome as the number of investors in the crowd rises. Crowdfunding draws a crowd: investors and other interested observers who follow the progress, or lack of progress, of a project. Sometimes it proves easier to raise the money for a project than to make the project a success. Managing communications with many possibly disappointed investors and supporters can be a substantial, and potentially diverting, task. Some of the most popular fundraising drives are for commercial companies that use the process to reach customers and at the same time market their products and services. This favors companies like microbreweries and specialist restaurants – in effect creating a "club" of people who are customers as well as investors. In the US in 2015, new rules from the SEC to regulate equity crowdfunding will mean that larger businesses with more than 500 investors and more than $25 million in assets will have to file reports like a public company. ''Benefits for the investor
There are several ways in which a well-regulated crowdfunding platform may provide the possibility of attractive returns for investors: * Crowdfunding reduces costs – The platforms reduce search costs and transaction costs, which allows higher participation in the market. Many individual investors would otherwise have a hard time investing in early-stage companies because of the difficulty of identifying a company directly and the high costs of joining an Angel Group or doing it through a professional venture capital firm. * Current early-stage investing is not efficient – Venture capital firms often neglect the consumer sector and focus mainly on high-tech companies. Crowdfunding opens up some of these neglected markets to individual investors. Crowdfunding doesn't make sense in every industry, but for some, like retail and consumer, it does. * Value of new investors – Investors can add value to companies when they act as brand advocates and they can even be used as a focus group. Crowdfunding allows individual investors to be a part of the company they invest in.Risks for the investor
On crowdfunding platforms, the problem ofIssues in medical crowdfunding
The rise of crowdfunding for medical expenses is considered, in large part, a symptom of an inadequate and failing healthcare system in countries such as the United States. Healthcare through crowdfunding relies on perceived deservingness and worth, which reproduces unequal outcomes in access. Rob Solomon, the CEO of GoFundMe, has commented on this: "The system is terrible. It needs to be rethought and retooled. Politicians are failing us. Health care companies are failing us. Those are realities. I don't want to mince words here. We are facing a huge potential tragedy. We provide relief for a lot of people. But there are people who are not getting relief from us or from the institutions that are supposed to be there. We shouldn't be the solution to a complex set of systemic problems." There are ethical issues in medical crowdfunding. There is a loss of patient privacy, as crowdfunding campaigns that disclose extensive personal information are generally more financially successful. The oversight regarding the veracity of claims is generally limited. For instance, physicians are obliged to uphold the ethics of the medical profession, such as patient confidentiality, but this runs in conflict with dishonest crowdfunding efforts. Medical crowdfunding perpetuates inequalities—associated with variables such as gender, class, and race—in access to healthcare. For example, the most successful campaigns raise funds for patients who are well connected in large social networks and are able to navigate the technological landscape. Finally, the use of medical crowdfunding might reduce the impetus to reform failing infrastructures to healthcare.See also
*References
Further reading
External links
* {{DEFAULTSORT:Crowd Funding 2000s neologisms Collaborative finance Entrepreneurship Financial technology Internet terminology Payment systems Technology in society