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THE ROCKING ORIGINS OF CROWDFUNDING

THE BIRTH OF CROWDFUNDING

We all came to know Crowdfunding as the practice of raising small (or big!) amounts of money from a large group of people through online platforms. It is extremely popular today as an alternative way for start-ups, NGOs, private companies, and individuals to source funds for their projects. Let’s have a look at the origin and different types of crowdfunding, as well as recent regulatory updates to see where crowdfunding stands today.

THE ORIGINS OF CROWDFUNDING

The first successful instance of a crowdfunding campaign was recorded in 1997 when Marillion, a British rock band, pioneered the internet business model used today when they funded their tour through online donations from fans. Their fans raised £39,000 to help them finance a North American tour. Slowly but steadily, and inspired by this creative method of funding, crowdfunding platforms began to emerge, and the industry has grown consistently ever since.

Today, we can count three main types of crowdfunding:

  • Equity crowdfunding
  • Perk-based crowdfunding
  • Donation-based crowdfunding
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EQUITY CROWDFUNDING

Equity crowdfunding allows private companies to sell a portion of their business in exchange for capital. Hundreds of non-professional investors can invest in your company through crowdfunding, the most common websites you know are seedrs.com and crowdcube.com or seedinvest.com for our American friends.

PERK-BASED CROWDFUNDING

In perk-based or reward crowdfunding, investors donate to a project with expectations of receiving a non-financial reward. The rewards vary depending on the donation amount, which incentivises higher contributions. Donors can receive branded merchandise, tickets to an event, credits on a record cover, gifts, etc. This type of funding is mainly for creative projects and it’s oftentimes used as a sort of pre-sale: a team with a cool project shows the crowd a cool proof of concept or prototype and then asks for support to bring it to life.

DONATION-BASED CROWDFUNDING

This type of crowdfunding is designed for organisations or individuals that raise money for personal use or charitable projects. Well-established charities coordinate crowdfunding through their websites, but there are crowdfunding platforms for small organisations and individuals raising money, such as gofundme.com. As the raised funds are donations, the fundraiser is not obliged to give the donors anything back in return.

NEW CROWDFUNDING REGULATIONS

In early 2021, the European Council approved the Pan-European regulation for crowdfunding. This new regulation will establish a harmonised legal framework for crowdfunding service providers operating a public digital platform that facilitates matching prospective investors with companies seeking funding through equity crowdfunding or lending-based crowdfunding. It applies explicitly to projects looking to raise less than less than £5,000,000 over a period of twelve months. This regulation only applies to crowdfunding platforms and not to reward or donation-based crowding as these are not considered financial services.

Key changes in the new regulation include:

  • “A single authorisation and passporting process for platforms willing to operate across Europe, coordinated by the European Securities and Markets Authority (ESMA).
  • A single set of requirements for businesses to raise up to € 5 million over a period of 12 months, without having to produce a full Prospectus.
  • A new harmonised document for each offering, the Key Investment Information Sheet (KIIS). The KIIS includes information about shareholders, features of the platform process, terms of the offering, risk factors, and investor rights or fees, among others.
  • A new investor assessment to confirm their understanding of the risks involved when investing in startups and private businesses.
  • A set of new obligations for platforms, including conflict of interest policies, prudential policies or information requirements for platforms willing to invest in their own offerings listed on the platform.”

Check the original article of our partners at Crowdcube.  

In the UK, the FCA regulates loan-based and investment-based crowdfunding, as well as payment services provided in connection with donation-based and reward-based ones.

Is Crowdfunding the way forward for you? Then we have great news to share: we partnered up with Crowcube and are all set to help you run a successful crowdfunding campaign.

Whether it’s through crowdfunding, from corporates or institutional investors, if you need help securing funding for your business, contact us today and let us help you.

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