What Is Crowdfunding?

Crowdfunding is defined as “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.” Some of the most well-known examples of products or businesses launched with crowdfunding include:

But, on a more practical level, what is crowfunding really? Where did the method of raising funding come from? What types of crowdfunding are there? What are the laws surrounding crowdfunding? What are the best crowdfunding platforms?

We have taken a deep dive into these topics, and more, below.

The History of Crowdfunding

Some people say that crowdfunding can be traced back to the 1700s, while others say the first crowdfunding project was a campaign by Joseph Pulitzer to raise funds to pay for a base for the Statue of Liberty, using his newspaper, The New York World, to advertise the cause, and raising enough money to cover the cost from more than 160,000 donors. However, crowdfunding as we know it today began in 1997 when fans donated money online to the British rock band Marillion to cover the cost of a reunion tour.

Crowdsourcing vs. Crowdfunding

It’s easy to conflate crowdsourcing and crowdfunding, and while crowdfunding is a type of crowdsourcing, in reality the two are quite different.

Crowdsourcing is a broad term that refers to the practice of engaging a “crowd,” or group of people, to help achieve a specified goal by collectively contributing ideas, time, funds or something else. For example, the navigation app Waze uses crowdsourcing to gather data about traffic, accidents and more to provide users with the fastest route from point A to point B.

Crowdfunding, on the other hand, refers specifically to a group of people contributing funds to a specific purpose.

What are the Different Types of Crowdfunding?

There are four primary types of crowdfunding employed today:

  • Rewards crowdfunding
  • Equity crowdfunding
  • Donation crowdfunding
  • Debt crowdfunding

Rewards-based crowdfunding is the type of crowdfunding project we most commonly work with at Enventys Partners. This method of crowdfunding uses rewards-based platforms such as Kickstarter or Indiegogo to extend perks or rewards to backers in exchange for a pledge. This type of crowdfunding is commonly used to bring new products, businesses or works of art to life, and is extremely popular as backers typically receive tangible goods in exchange for their financial support.

Equity crowdfunding is another type of crowdfunding we frequently work with at Enventys Partners. This method of crowdfunding became fully legal in May 2016, when Title III of the JOBS Act went into effect. Equity crowdfunding platforms connect entrepreneurs and business owners with Accredited and Non-Accredited Investors who can obtain equity in a business in exchange for financial contributions. This method of crowdfunding is closely regulated by the federal government. Wefunder, StartEngine, MicroVentures and SeedInvest are some of the most widely-used equity crowdfunding platforms.

Donation-based crowdfunding is a way for individuals to support public or private initiatives without receiving a return for their contribution. One of the most well known donation-based crowdfunding platforms is GoFundMe, which is frequently used to raise funds to cover medical expenses, disaster recovery and more.

Debt-based crowdfunding is also called peer-to-peer lending, and it is a way for entrepreneurs to acquire funding without turning to the banks by borrowing from investors and then repaying them with interest.

Crowdfunding and the JOBS Act

Equity crowdfunding was first made legal in 2012 when President Obama signed into law the JOBS Act, or the Jumpstart Our Business Startups Act. The goal of this Act was to reduce constrictive regulations, allowing for the funding of small businesses by outside investors. This Act contains five different titles, each addressing problems and challenges facing startups and small businesses.

Title I of the JOBS Act was passed with the initial legislation, and was designed to assist emerging growth companies (those with less than $1 billion in revenue over the past fiscal year) interested in executing an Initial Public Offering. Title I does this by exempting certain disclosures that have been a past deterrent to offering shares of stock in emerging growth companies.

Title II of the JOBS Act was enacted in September 2013. This title streamlined communication and general solicitation of Accredited Investors. Prior to the JOBS Act, investors could only be solicited through private, in-person meetings with family, friends and colleagues. Now, companies can publicly advertise their intent to acquire funding for their projects. This is particularly important to those looking to raise capital through equity crowdfunding, as it allows them the opportunity to advertise their offerings online and through social media.

Title III of the JOBS Act became effective in May 2016. It allows companies to procure capital from Non-Accredited Investors. Prior to this, only Accredited Investors could participate in equity crowdfunding. Accredited Investors are those who meet standards set forth by the SEC (I. An individual or married couple whose value exceeds $1 million excluding the value of their primary residence. II. An individual with an income exceeding $200,000 a year for the last two years; $300,000 for a married couple). Note that there are still limitations to how much an individual can invest and how much a company can raise from Non-Accredited Investors.

Title IV of the JOBS Act is also referred to as Regulation A+, which is built upon benchmarks established in Regulation A. For Regulation A, an exemption is granted from certain registration requirements for small offerings for companies that don’t exceed $5 million in a 12-month period. Regulation A+ increases the offering limit to $50 million and requires that certain filings be given to the investors. Annual audited financial statements are also required. Mini-IPOs under Regulation A+ are open to Accredited and Non-Accredited Investors alike.

Titles V and VI of the JOBS Act help private companies stay private longer by raising the number of shareholders a company or bank can have before they are subject to the Exchange Act annual reporting requirements.

Why Use Crowdfunding?

Whether you are using equity crowdfunding to fund your startup or you are considering backing a Kickstarter campaign for a new product, crowdfunding offers benefits to everyone involved.

Benefits of crowdfunding for business owners and project creators include:

  • Access to capital
  • Access to a network of early adopters interested in the success of your venture
  • Access to support from your investors or backers
  • Exposure and public relations
  • Simplicity compared to other methods of raising capital
  • Concept pre-sales
  • Credibility derived from a successful proof of concept

Benefits of crowdfunding for backers and investors include:

  • Opportunity to get involved in the “next big thing”
  • “First dibs” on a new product or business
  • Opportunity for low investment
  • Opportunity to support a business

Want to learn more about how crowdfunding can help you build your business or launch a new project? Request a quote today!