CROWDFUNDING is the practice of funding a project or venture by
raising monetary contributions from a large number of people.
Although the concept can also be executed through mail-order
subscriptions, benefit events, and other methods, it is now often
* 1 History
* 2 Types
* 2.1 Reward-based
* 2.2 Equity
* 3 Role * 4 Platforms
* 5 Significant campaigns
* 5.1 Early campaigns * 5.2 Highest-grossing campaigns * 5.3 Kickstarter campaigns * 5.4 Controversy
* 6 Applications
* 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 * 9 References * 10 Further reading
_ A printed receipt 135 x 97 mm issued between 1850 and 1857 to
support the French philosopher
War bonds are theoretically a form of crowdfunding military
conflicts. London's mercantile community saved the
Bank of England
The phenomenon of crowdfunding is older than the term "crowdfunding". According to wordspy.com, the earliest recorded use of the word was in August 2006.
* Rewards crowdfunding: entrepreneurs presell a product or service to launch a business concept without incurring debt or sacrificing equity/shares. * 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 projects.
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. Value tokens are endogenously created by particular open decentralized networks that and 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 _."
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 platforms. 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.
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.
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,
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.
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
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
The highest reported funding by a crowdfunded project to date is _ Star Citizen _, an online space trading and combat video game being developed by Chris Roberts and Cloud Imperium Games , which—as of 3 April 2017 —claimed to have raised over USD $145,000,000, beating the previous record of $10,266,844 set by Pebble Watch .
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 Kickstarter platform prior to the date of publication:
* Musician 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 potatoes.
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
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_ 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
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 raised.
Following the Alexander incident of May 2014, WePay CEO Bill Clerico wrote an explanation of their terms in relation to adult services to the _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 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 project.
Traditionally, journalists are not involved in advertising and
BENEFITS AND RISKS
BENEFITS FOR THE CREATOR
* 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 – crowd funding 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 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 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 Palmer 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
* 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. * 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.
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 start-ups.
BENEFITS FOR THE INVESTOR
There are several ways in which a well-regulated crowdfunding platform can provide attractive returns for investors:
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.
* Angel investor * Assurance contract * Business models for open-source software * Comparison of crowd funding services * Crowd funding in video games * Crowdsourcing * Fan-funded music * List of highest funded crowdfunding projects * List of highest funded equity crowdfunding projects * Microcredit * Microfinance * One Spark * Threshold pledge system
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