Crowdfunding is the practice of funding a project or venture by
raising many small amounts of money from a large number of people,
typically via the Internet.
Crowdfunding is a form of crowdsourcing
and of alternative finance. In 2015, it was estimated that worldwide
over US$34 billion was raised this way.
Although similar concepts can also be executed through mail-order
subscriptions, benefit events, and other methods, the term
crowdfunding refers to Internet-mediated registries. This modern
crowdfunding model is generally based on three types of actors: the
project initiator who proposes the idea and/or project to be funded,
individuals or groups who support the idea, and a moderating
organization (the "platform") that brings the parties together to
launch the idea.
Crowdfunding has been used to fund a wide range of for-profit
entrepreneurial ventures such as artistic and creative projects,
medical expenses, travel, or community-oriented social
entrepreneurship projects. Some requests, such as those to pay for
optional expenses such as vacations, weddings, or cosmetic surgery,
are widely derided as internet begging or cyberbegging.
Software value token
5 Significant campaigns
5.1 Early campaigns
5.2 Highest-grossing campaigns
6.1 Food and agriculture
6.2 Philanthropy and civic projects
6.3 Real estate
Intellectual property exposure
6.7 International development
6.8 Legal developments
7 Benefits and risks
7.1 Benefits for the creator
7.2 Risks and barriers for the creator
7.3 Benefits for the investor
7.4 Risks for the investor
8 See also
10 Further reading
A printed receipt 135 x 97 mm issued between 1850 and 1857 to support
the French philosopher Auguste Comte[unreliable source?]
Crowdfunding has a long history with several 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. The subscription business model is
not exactly crowdfunding, since the actual flow of money only begins
with the arrival of the product. The list of subscribers has, though,
the power to create the necessary confidence among investors that is
needed to risk the publication.
War bonds are theoretically a form of crowdfunding military conflicts.
London's mercantile community saved the
Bank of England
Bank of England in the 1730s
when customers demanded their pounds to be converted into gold - they
supported the currency until confidence in the pound was restored,
thus crowdfunded their own money. A clearer case of modern
crowdfunding is Auguste Comte's scheme to issue notes for the public
support of his further work as a philosopher. The "Première
Circulaire Annuelle adressée par l’auteur du Système de
Philosophie Positive" was published on 14 March 1850, and several of
these notes, blank and with sums have survived. The cooperative
movement of the 19th and 20th centuries is a broader precursor. It
generated collective groups, such as community or interest-based
groups, pooling subscribed funds to develop new concepts, products,
and means of distribution and production, particularly in rural areas
of Western Europe and North America. In 1885, when government sources
failed to provide funding to build a monumental base for the Statue of
Liberty, a newspaper-led campaign attracted small donations from
Crowdfunding on the internet first gained popular and mainstream use
in the arts and music communities. The first noteworthy instance
of online crowdfunding in the music industry was in 1997, when fans
underwrote an entire U.S. tour for the British rock band Marillion,
raising US$60,000 in donations by means of a fan-based Internet
campaign. They subsequently used this method to fund their studio
albums. In the film industry, independent writer/director
Mark Tapio Kines designed a website in 1997 for his then-unfinished
first feature film Foreign Correspondents. By early 1999, he had
raised more than US$125,000 on the
Internet from at least 25 fans,
providing him with the funds to complete his film. In 2002, the
"Free Blender" campaign was an early software crowdfunding
precursor. The campaign aimed for open-sourcing the Blender 3D
computer graphics software by collecting $100,000 from the community
while offering additional benefits for donating members.
Crowdfunding started to gain mainstream traction with the launch of
ArtistShare (2003). As the model matured, more crowdfunding sites
started to appear on the web such as
Microventures (2010), and
The phenomenon of crowdfunding is older than the term "crowdfunding".
According to wordspy.com, the earliest recorded use of the word was in
Crowdfunding Centre's May 2014 report identified two primary types
Rewards crowdfunding: entrepreneurs presell a product or service to
launch a business concept without incurring debt or sacrificing
Equity crowdfunding: the backer receives shares of a company, usually
in its early stages, in exchange for the money pledged.
Reward-based crowdfunding has been used for a wide range of purposes,
including motion picture promotion, free software development,
inventions development, scientific research, and civic
Many characteristics of rewards-based crowdfunding, also called
non-equity crowdfunding, have been identified by research studies. In
rewards-based crowdfunding, funding does not rely on location. The
distance between creators and investors on Sellaband was about 3,000
miles when the platform introduced royalty sharing. The funding for
these projects is distributed unevenly, with a few projects accounting
for the majority of overall funding. Additionally, funding increases
as a project nears its goal, encouraging what is called "herding
behavior". Research also shows that friends and family account for a
large, or even majority, portion of early fundraising. This capital
may encourage subsequent funders to invest in the project. While
funding does not depend on location, observation shows that funding is
largely tied to the locations of traditional financing options. In
reward-based crowdfunding, funders are often too hopeful about project
returns and must revise expectations when returns are not met.
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 nonequity 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.
Software value token
Another kind of crowdfunding is to raise funds for a project where a
digital or software-based value token 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 on blockchain-based crowdfunding can also
represent equity, bonds, or even "market-maker seats of governance"
for the entity being funded. Examples of such crowdsales are Augur
decentralized, distributed prediction market software which raised
US$4 million from more than 3500 participants; Ethereum
blockchain; Digix/DigixDAO; and "The DAO." Some of
the largest token crowdsales in 2017 were Tezos which raised US$232
million, Bancor which raised US$153 million and Status which raised
See also: Peer-to-peer lending
Debt-based crowdfunding (also known as "peer to peer", "P2P",
"marketplace lending", or "crowdlending") arose with the founding of
Zopa in the UK in 2005 and in the US in 2006, with the launches of
Lending Club and Prosper.com. Borrowers apply online, generally
for free, and their application is reviewed and verified by an
automated system, which also determines the borrower's credit risk and
interest rate. Investors buy securities in a fund which makes the
loans to individual borrowers or bundles of borrowers. Investors make
money from interest on the unsecured loans; the system operators make
money by taking a percentage of the loan and a loan servicing fee.
In 2009, institutional investors entered the P2P lending arena; for
example in 2013, Google invested $125 million in Lending Club. In
2014 in the US, P2P lending totalled about $5 billion. In 2014 in
the UK, P2P platforms lent businesses £749 million, a growth of 250%
from 2012 to 2014, and lent retail customers £547 million, a growth
of 108% from 2012 to 2014.:23 In both countries in 2014, about 75%
of all the money transferred through crowdfunding went through P2P
Lending Club went public in December 2014 at a
valuation around $9 billion. Debt crowdfunding in the U.S. further
evolved with the 2016 enactment of Title III of the JOBS Act, which
allows unaccredited investors to invest directly in private businesses
through regulated Funding Portals or Broker-Dealers.
Litigation crowdfunding allows plaintiffs or defendants to reach out
to hundreds of their peers simultaneously in a semiprivate 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).
LexShares is a platform that allows accredited
investors to invest in lawsuits.
Charity donation-based crowdfunding is the collective effort of
individuals to help charitable causes. In charity crowdfunding,
funds are raised for pro-social or pro-environmental purposes.
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. Each individual acts as an agent of the offering,
selecting and promoting 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). Motivation for consumer
participation stems from the feeling of being at least partly
responsible for the success of others’ 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 and innovative 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
reveal 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; (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. In 2012, more than one million
individual campaigns were established globally and the industry
was projected to grow to US$5.1 billion in 2013. and to reach US$1
trillion in 2025. A May 2014 report, released by the United
Crowdfunding Centre and titled "The State of the
Crowdfunding Nation", presented data showing that during March 2014,
more than US$60,000 were raised on an hourly basis via global
crowdfunding initiatives. Also during this period, 442 crowdfunding
campaigns were launched globally on a daily basis.
Further information: Comparison of crowd funding services
In 2012, there were over 450 crowdfunding platforms operating. In
2015 it was predicted that there would be over 2,000 crowdfunding
sites to choose from in 2016. Project creators need to exercise
their own due diligence to understand which platform is the best to
use depending on the type of project that they want to launch.
Fundamental differences exist in the services provided by many
crowdfunding platforms. For instance,
Internet platforms which enable small companies to issue shares over
Internet and receive small investments from registered users in
CrowdCube is meant for users to invest small amounts and
acquire shares directly in start-up companies,
Seedrs pools the funds
to invest in new businesses, as a nominated agent.
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
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 2004, Electric Eel Shock, a Japanese rock band,
raised £10,000 from 100 fans (the Samurai 100) by offering them a
lifetime membership on the band's guestlist. Two years later, they
became the fastest band to raise a US$50,000 budget on SellaBand.
Franny Armstrong later created a donation system for her feature film
The Age of Stupid. Over five years, from June 2004 to June 2009
(release date), she raised £1,500,000. In December 2004, French
entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc,
launched a public
Internet donation campaign  to fund their short
science fiction film, Demain la Veille (Waiting for Yesterday). Within
a month, they managed to raise €17,000 online, allowing them to
shoot their film.
As of 2015 the highest reported funding by a crowdfunded project to
date was Star Citizen, an online space trading and combat video game
being developed by Chris Roberts and Cloud Imperium Games; it had
raised $77M by that time, and while it had a devoted fan base it was
also criticized for being a potential scam.
Brave’s $35 million Basic Attention Token (BAT) sale sold out in
less than 30 seconds.
On April 17, 2014, the Guardian media outlet published a list of "20
of the most significant projects" launched on the
prior to the date of publication:
Amanda Palmer raised US$1.2 million from 24,883 backers in
June 2012 to make a new album and art book.
The "Coolest Cooler" raised a total of $13,285,226 from 62,642
backers. The cooler features a blender, waterproof Bluetooth
speakers and an LED light.
Zack Brown raised $55,000 from over 6900 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
Amanda Palmer (shown above) raised funds for her album using
Although musician Palmer raised over $1 million through the
Kickstarter crowdfunding process, she received criticism afterward,
some of which was published in prominent media outlets. Writing for
the New Yorker, Joshua Clover initially focused upon issues specific
to Palmer, but then broadened the scope of his examination to include
financial conduct in the
Internet era. ("you can’t spell Internet
without intern.") According to Clover, Palmer initially invited local
musicians to play on stage with her band and her on the stops of her
U.S. tour, but offered to "feed you beer, hug/high-five you up and
down (pick your poison), give you merch, and thank you mightily,"
instead of monetary compensation, as the money raised on Kickstarter
was allocated to the production of the next studio album—in
accordance with the campaign—as well as other financial
commitments. This decision was then overturned a week later, as
Palmer explained on her blog:
My management team tweaked and reconfigured financials, pulling money
from this and that other budget (mostly video) and moving it to the
tour budget. All of the money we took out of those budgets is going to
the crowd-sourced musicians fund. We are going to pay the volunteer
musicians every night ... We're also retroactively sending a payment
to the folks who've already played with us.
Clover also made reference to the British political situation at the
time, writing "that even newly minted haves, like Amanda Palmer,
really need to treat have-nots, such as local musicians, a whole lot
better." In a September 12, 2012
New York Times
New York Times article, American
Federation of Musicians President Raymond M. Hair Jr. explained, "If
there's a need for the musician to be on the stage, then there ought
to be compensation for it." The following day, prominent sound
engineer and musician
Steve Albini was also vocal and, after initially
referring to Palmer as an "idiot," apologized, writing that he had not
met her or heard her music. Following his apology, in which he admits
"it's my fault," Albini asserted: "It should be obvious also that
having gotten over a million dollars from such an effort that it is
just plain rude to ask for further indulgences from your audience,
like playing in your backing band for free."
Controversy arose in the crowdfunding sector in May 2014 when an adult
entertainer was blocked by platform GiveForward. Following an allergy
reaction, Eden Alexander required intensive medical treatment, but
doctors, aware of her occupation, associated her health issue with
drug use and did not provide the necessary care to a sufficient
extent; as a consequence, Alexander's condition worsened. Alexander
then launched a GiveForward crowdfunding campaign to cover her medical
bills, but the campaign was removed from the platform after a social
media exchange, whereby a potential donor requested nude pictures as
reciprocation and Alexander agreed to the offer—this was noticed
within a brief time frame and WePay, the payment service used by
GiveForward, deemed the negotiation a violation of WePay's terms of
service, considering it the offer of "Adult or adult-related services
... Adult or adult-related content ... and Obscene or pornographic
items." Alexander restarted her crowdfunding campaign by using the
services of Tilt.com. The campaign ended on June 13, 2014 with $10,550
Following the Alexander incident of May 2014,
WePay CEO Bill Clerico
wrote an explanation of their terms in relation to adult services to
TechCrunch media outlet:
WePay faces tremendous scrutiny from its partners & card networks
around the enforcement of policy, especially when it comes to adult
content. We must enforce these policies or we face hefty fines or the
risk of shutdown for the many hundreds of thousands of merchants on
our service. We’re incredibly sorry that these policies added to the
difficulties that Eden is facing. We offered to help her setup a new
campaign that complied with our policies, but I believe that her
friends chose to work with another company instead. We continue to
stand by to help if Eden would like to work with us further, and we
are reviewing both our Terms of Service & account shutdown process
to see how we can avoid situations like this in the future.
Clerico further stated that such practice is "a relatively common
requirement in the industry" and assured the
TechCrunch writer that
WePay agreed to cease Alexander's campaign "because we are
contractually required to."
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. Community music labels are usually
for-profit organizations where "fans assume the traditional financier
role of a record label for artists they believe in by funding the
recording process". Since pioneering crowdfunding in the film
industry, Spanner Films has published a "how to" guide. A
Financialist article published in mid-September 2013 stated that "the
niche for crowdfunding exists in financing films with budgets in the
[US]$1 to $10 million range" and crowdfunding campaigns are "much more
likely to be successful if they tap into a significant pre-existing
fan base and fulfill an existing gap in the market." Innovative
new platforms, such as RocketHub, have emerged that combine
traditional funding for creative work with branded
crowdsourcing—helping artists and entrepreneurs unite with brands
"without the need for a middle man."
Food and agriculture
Several crowdfunding platforms have emerged that allow people to
donate or invest in food- and agriculture-related opportunities.
AgFunder is one global platform that gives both individual and
institutional investors access to venture capital investments, both in
agriculture technology and food technology companies. Cropital has
developed a platform to allow investors to invest in small-holder
farmers, and rewards-based platforms like Barnraiser allow users
to support farmers and food startups.
The crowdfunding platform
PieShell was launched in 2016 to focus
exclusively on food and beverage campaigns.
Philanthropy 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
facilitate crowdfunding of loans managed by microcredit organizations
in developing countries. The US-based nonprofit
Zidisha applies a
direct person-to-person lending model to microcredit lending for
low-income small business owners in developing countries.
DonorsChoose.org, founded in 2000, allows public school teachers in
the United States to request materials for their classrooms.
Individuals can lend money to teacher-proposed projects, and the
organization fulfills and delivers supplies to schools. There are also
a number of own-branded university crowdfunding websites, which enable
students and staff to create projects and receive funding from alumni
of the university or the general public. Several dedicated civic
crowdfunding platforms have emerged in the US and the UK, some of
which have led to the first direct involvement of governments in
crowdfunding. In the UK,
Spacehive is used by the
Mayor of London
Mayor of London and
Manchester City Council
Manchester City Council to co-fund civic projects created by
citizens. Similarly, dedicated humanitarian crowdfunding
initiatives are emerging, involving humanitarian organizations,
volunteers and supports in solving and modeling how to build
innovative crowdfunding solutions for the humanitarian community.
Likewise, international organizations like the Office for the
Coordination of Humanitarian Affairs (OCHA) have been researching and
publishing about the topic.
One crowdfunding project, iCancer, was used to support a Phase 1 trial
of AdVince, an anti-cancer drug in 2016.
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 downpayments and similar real estate
related outlets. Investment, via specialised 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 tendency. 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.
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 of
copyright and trademark protection as well as a new form of idea
protection supported by the World Intellectual Property Organization
called Creative Barcode.
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.
Further information: Category:Crowdfunded science
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 a participatory culture. Though
deciding which stories are published is a role that traditionally
belongs to editors at more established publications, crowdfunding can
give the public an opportunity to provide input in deciding which
stories are reported. This is done by funding certain reporters and
their pitches. Donating can be seen as an act that "bonds" reporters
and their readers. This is because readers are expressing interest for
their work, which can be "personally motivating" or "gratifying" for
Spot.us, which was closed in February 2015, was a crowdfunding
platform that was specifically meant for journalism. The
website allowed for readers, individual donors, registered Spot.us
reporters, or news organizations to fund or donate talent toward a
pitch of their choosing. While funders are not normally involved in
Spot.us allowed for donors or "community members"
to become involved with the co-creation of a story. This gave them the
ability to edit articles, submit photographs, or share leads and
information. According to an analysis by Public Insight Network,
Spot.us was not sustainable for various reasons. Many contributors
were not returning donors and often, projects were funded by family
and friends. The overall market for crowdfunding journalism may also
be a factor; donations for journalism projects accounted for .13
percent of the $2.8 billion that was raised in 2013.
Larger crowdfunding platforms such as
Indiegogo or Kickstarter, both
of which are not journalism-specific, may garner more success for
projects. This is because these large-scale platforms can allow
journalists to reach new audiences. In 2017, 2.3 million out of
Kickstarter's 7.9 million users had donated toward more than one
Traditionally, journalists are not involved in advertising and
Crowdfunding means that journalists are attracting funders
while trying to remain independent, which may pose a conflict.
Therefore, being directly involved with financial aspects can call
journalistic integrity and journalistic objectivity into question.
This is also due to the fact that journalists may feel some pressure
or "a sense of responsibility" toward funders who support a particular
Crowdfunding can also allow for a blurred line between
professional and non-professional journalism because if enough
interest is generated, anyone may have their work published.
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
Crowdfunding and crowdfund investing have several
important roles to play in the developing world’s entrepreneurial
and venture finance ecosystem.”
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, 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
Benefits and risks
Benefits for the creator
Crowdfunding campaigns provide producers with a number of benefits,
beyond the strict financial gains. The following are 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.
Audience engagement – crowdfunding creates a forum where project
initiators can engage with their audiences. Audience can engage in the
production process by following progress through updates from the
creators and sharing feedback via comment features on the project's
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 to "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. Proponents of the crowdfunding approach
argue that it allows good ideas which do not fit the pattern required
by conventional financiers to break through and attract cash through
the wisdom of the crowd. If it does achieve "traction" in this way,
not only can the enterprise secure seed funding to begin its project,
but it may also secure evidence of backing from potential customers
and benefit from word of mouth promotion in order to reach the
fundraising goal. Another potential positive effect is the
propensity of groups to "produce an accurate aggregate prediction"
about market outcomes as identified by 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
Kickstarter controversy, 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 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
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
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.
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's 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 a large number of possibly disappointed investors
and supporters can be a substantial, and potentially diverting,
Some of the most popular fundraisings are for commercial companies
which 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 USA 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. The Wall
Street Journal commented "It is all the pain of an IPO without the
benefits of the IPO."  These two trends may mean crowdfunding is
most suited to small consumer-facing companies rather than tech
Benefits for the investor
There are several ways in which a well-regulated crowdfunding platform
can provide attractive returns for investors:
Crowdfunding Reduces Costs – The platforms reduce search and
transaction costs, which allows a higher participation in the market.
Many individual investors would otherwise have a hard time to invest
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 firm.
Current Early Stage Investing Isn’t Efficient – Venture capital
firms often neglect the consumer sector and focus mainly on high-tech
Crowdfunding opens up some of these neglected markets to
Crowdfunding doesn’t make sense in every
industry, but for some, like retail and consumer, it does.
Value of New Investors – Another reason why crowdfunding is
attractive is that the investors add value to companies. They act as
brand advocates and can even be used as a focus group. Crowdfunding
allows individual investors to be a valuable part of the company they
Risks for the investor
On crowdfunding platforms, the problem of information asymmetry is
exacerbated due to the reduced ability of the investor to conduct due
diligence. Early stage investing is typically localized, as the
costs of conducting due diligence before making investment decisions
and the costs of monitoring after investing both rise with distance.
However, this trend is not observed on crowdfunding platforms - these
platforms are not geographically constrained and bring in investors
from near and far. On non-equity or reward-based platforms,
investors try to mitigate this risk by using the amount of capital
raised as a signal of performance or quality. On equity-based
platforms, crowdfunding syndicates reduce information asymmetry
through dual channels – through portfolio diversification and better
due diligence as in the case of offline early-stage investing, but
also by allowing lead investors with more information and better
networks to lead crowds of backers to make investment decisions.
Business models for open-source software
Comparison of crowd funding services
Crowd funding in video games
List of highest funded crowdfunding projects
List of highest funded equity crowdfunding projects
Threshold pledge system
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Studies and Papers
Crowdfunding Civil Justice, Boston College Law Review,
Crowdfunding and Civic Society in Europe: A Profitable Partnership?
Open Citizenship, vol. 4, no. 1. (2013).
Dynamics of Crowdfunding: Determinants of Success and Failure by Ethan
Mollick, examines what causes individual projects to succeed or fail.
An Empirical Examination of the Antecedents and Consequences of
Contribution Patterns in Crowd-funded Markets examines the patterns of
crowdfunding in journalism
Is There an eBay for Ideas? European Management Review, 2011
Herding Behavior as a Network Externality, Proceedings of the
International Conference on Information Systems, Shanghai, December
The Geography of Crowdfunding, NET Institute Working Paper No. 10-08,
Crowdfunding and the Recording Industry: A Model for the U.S.?
Crowdfunding and the Federal Securities Laws by C. Steven Bradford
The Kapipalist Manifesto, Principles of Crowdfunding, February 2010
The micro-price of micropatronage, The Economist, September 27, 2010
Putting your money where your mouse is, The Economist, September 2,
Cash-strapped entrepreneurs get creative in BBC News
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