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Four Forms of Crowdfunding Explained
editorial

Four Forms of Crowdfunding Explained

Editor's Note: The following is a guest post that comes to us from FundingLaunchPad.com and Leverage PR. It was originally posted here and is re-posted on Crowdsourcing.org with permission.

With the passage of the JOBS Act, crowdfunding has received a lot of attention lately. In an effort to explain what crowdfunding is and how your business could potentially benefit from it, we have asked David Milliken, Co-Founder and SVP of Marketing for Funding Launch Pad to do a guest post about crowdfunding.

The crowdfunding concept dates back to the 1700s, when Jonathan Swift launched the Irish Loan Fund.[i] Crowdfunding is broadly described as aggregating funds from a broad donor base towards a common cause. This guest blog post explores the four common forms of crowdfunding.

Crowdfunding Graph

Microfinance

Microfinance is when contributors align to provide financial services, often seemingly miniscule loans, to low-income clients. Recipients generally lack access to banking services[ii].

Historic examples of microfinance include Swift Irish Loan Fund, and more recently, the March of Dimes. Barack Obama’s 2008 campaign fundraising approach, accepting smaller than traditional contributions from a broader voter base, could be considered a form of microfinance.

Today’s microfinance model began when Nobel Prize winner Muhammad Yunus began giving microloans in the 1970s to help the poor in his native Bangladesh escape poverty. Kiva.org is a prominent microfinance platform, having facilitated $303 million in loans.

Peer-to-Peer Loans

Also known as P2P loans or social lending, peer-to-peer lending enables individuals to borrow from a group of lenders, without the use of an official financial institution as an intermediary[iii]. The theory is that by removing the overhead of banks, borrowers receive lower rates while lenders earn higher returns than expected from savings accounts.

P2P lending grew over 1200%, from $118 million to $1.555 billion, in outstanding loans between 2005 and 2008[iv]. P2P lending is highly regulated by a maze of securities laws. Leading platforms in this fast growing field are Prosper.com and Funding Circle.

Donation-Based Crowdfunding

Donation-based crowdfunding (DBC) has exploded in the past few years, with hundreds of platforms. DBC campaigns are often creative (movies, music, art), community, or philanthropic projects. They can also be business-oriented, like the Pebble watch that recently broke the record for largest DBC campaign[v].

When contributing to a DBC project, you are guaranteed no financial return. Instead, you generally receive a non-monetary reward related to the project, like a T-shirt, pre-released CD, credits, or unique experiences. No financial returns mean DBC campaigns are not impacted by securities laws, and are generally viewed as legal today[vi].

The DBC industry nearly quadrupled in 2011, from $32 million to $123 million[vii]. According to Funding Launchpad’s exclusive consumer research, despite hundreds of platforms, Kickstarter dominates the DBC landscape. IndieGoGo and RocketHub are also major sites[viii].

Investment Crowdfunding

With investment crowdfunding, the crowd earns securities – equity, debt, or a revenue share – in exchange for their contributions. Today, investment crowdfunding is generally considered illegal in the US[ix], but Title III of the recently passed JOBS Act will change that. The Securities and Exchange Commission has 270 days to write the rules and establish a new type of intermediary called a “funding portal” so investment crowdfunding will probably not be enacted in America until Q1 or Q2 2013. To learn more about the crowdfunding portion of the JOBS Act, please see our plain English summary.

Entrepreneurs and politicians expect investment crowdfunding to boost the American economy by giving startups and small businesses access to a new source of capital. Investment crowdfunding is the primary driver behind consultancy Gartner predicting the industry to grow to $6.2 billion by 2013[x]. Crowdfunding for securities is already an emerging fundraising tool outside the US. Leading platforms around the world include Crowdcube (UK), Symbid (The Netherlands), and ASSOB (Australia).

Types of Crowdfunding

- Funding Launchpad is a funding portal in planning, FundingLaunchpad.com. Funding Launchpad will offer startups and small businesses all the tools they need to prepare for investment crowdfunding, successfully raise money, and manage investors. Consumers will enjoy a broad variety of investments in some of America’s most interesting emerging companies.

Today, Funding Launchpad provides crowdfunding news, views, and features of crowdfunding campaigns from around the world.


 [i] http://mashable.com/2011/09/15/crowdfunding-history/
[ii] http://en.wikipedia.org/wiki/Microfinance
[iii] http://www.investopedia.com/terms/p/peer-to-peer-lending.asp
[iv] http://www.washingtonpost.com/wp-dyn/content/article/2009/09/19/AR2009091900124.html
[v] http://www.kickstarter.com/projects/597507018/pebble-e-paper-watch-for-iphone-and-android
[vi] Crowdsourcing.org
[vii] http://www.forbes.com/sites/techonomy/2012/03/30/123-million-crowdfunding-market-nearly-quadrupled-in-a-year-report-says/
[viii] http://fundinglaunchpad.com/wp-content/uploads/2012/04/Investment-Crowdfunding-White-Paper.Funding-Launchpad.pdf
[ix] http://en.wikipedia.org/wiki/Crowd_funding#Legal_regulation
[x] http://cynthiakocialski.com/blog/2011/11/16/drawing-a-crowd-crowdfunding-heats-up/

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