What is Crowd-funding?
Crowd-funding is an unconventional way to raise capital usually carried out online, and it has become increasingly popular. Many entrepreneurs, existing businesses, and artists view it as a great alternative to fund their start-ups, projects, products, or businesses rather than taking out loans.
How Does it Work?
There are two main types of crowd-funding – rewards-based crowd-funding and equity crowd-funding.
Rewards-based crowd-funding is when an entrepreneur promises incentives for donations, such as discounts, products, or services. It allows entrepreneurs to present their business plan and launch it without incurring debt or sacrificing equity.
Equity crowd-funding is when people invest in a new or existing business and receive equity shares in exchange. The company is not a listed company and there are limitations on who and how much one is allowed to invest.
Who is Crowd-funding For?
It is important to realize that there are many options and platforms to evaluate before developing a campaign. Some forms of crowd-funding are better suited for creating awareness and gaining support while others have the potential to generate more funds in order to get a project or company started. For example, while equity crowd-funding usually happens in the early stages of a business it is very possible for existing companies to use other forms of crowd-funding, such as peer-to-peer lending, in order to fund a project or new product.
What Are the Risks?
The beauty of the crowd-funding is that, depending on the platform and type used, generally there are no risks for the recipient. Investors are most susceptible to risks due to limited information and fraudulent projects. Entrepreneurs are not held liable if their company fails; however, they can face litigation if raised funds are not used as promised or if obligations, such as promised incentives, are not met.
If you are new in business and need to raise capital, be sure to research the many options and platforms, such as Kickstarter and Indiegogo, in order to determine the most beneficial option for your type of business. Be aware that there may be fees to use these services and that each platform has different rules. For more information on crowd-funding, the laws governing it, and its affect on society see this infographic from Forbes.com.
