Crowdfunding

Crowdfunding

What is Crowdfunding?

Crowdfunding is the idea of funding projects or businesses from a crowd, rather than having a few investors contribute to the project or business idea.

Crowdfunding is typically used in a start-up business to bring a new product or service into the world or assist individuals who may have been impacted by natural disasters or infrequent tragic events.

Recently, the introduction of Patreon and Substack have motivated artists, podcasters, writers, and musicians to keep their creative careers alive from the funding made through crowdfunding. Audiences of crowdfunding have contributed to their favorite podcasters, artists, and musicians to maintain steady flows of income and allows them to keep their dreams alive.

Four types of crowdfunding:

Rewards:

Money given in support of a crowdfunding business or project receive a reward in return for their donations. The incentive is to give varying sizes of rewards based on increased contributions.

Kickstarter, Indiegogo

Donation:

People give money in support of a business, campaign, or people.

GoFundMe

Debt:

Money that is pledged by supporters, finance a loan for a person or business in need of the financial support. Eventually the loan will have to be repaid with interest by a designated timeline. Typically, the debt-based donations are peer-to-peer lending, which means it connects people or businesses willing to loan money with people or businesses willing to borrow money.

LendingClub

Equity:

Allows small businesses to give portions of its business away in exchange for the funding. Participants would receive shares of the business based on how much money was contributed by the participant.

Crowdfunding allows businesses to attract a large number of funders that are convinced that the project or business idea is worth the investment/support. The use of social media has helped make crowdfunding popular, bringing investors together to fund businesses as they see fit. Crowdfunding allows people, who are potential investors, to select various projects that appeal to them and invest as little as $10 for funding of a business or project. Restrictions are also set in place to limit how much a person can contribute to a business through the platform. Due to crowdfunding, the opportunities to raise and fund ideas have given individuals funding to pursue projects and goals that may have never been possible without the help of such funding.

The SEC currently regulates the equity-based crowdfunding taking place in the United States to ensure portal operators conduct business funding appropriately and follow reporting requirements for the investors and issuers participating in the funding. Funding requirements have become more applicable under the SEC as it restricts the dollar amount individual investors can invest across all crowdfunding contributions over 12 months and oversee companies’ crowdfunding raises to ensure they don’t exceed maximum aggregate amounts within a 12 month period.

Advantages of Crowdfunding

Individuals or start-up companies benefit from crowdfunding, which allows them to access a larger group of potential investors and funders to achieve a goal of some sort. The pairing of social media and crowdfunding has made it possible for audiences to contribute collectively and fund individuals in need of developing businesses or pursuing creative careers in podcasting, music, or art. There are crowdfunding projects that include rewards or gifts for contributing funds to projects or start-up businesses. The issuance of equity-based crowdfunding allows start-up companies to raise money without losing control of ownership to venture capital investors.

Disadvantages of Crowdfunding

A major disadvantage lies in the reputation that could be damaged if funded goals are not met. The funding goal that is not met will result in pledged money being returned to the investors, as the business or individuals requesting funds receives nothing.

Summary

To summarize the effectiveness of crowdfunding: There is a greater range of audiences willing to invest or support with the simplicity of smart phones, the internet and technological access. By gaining more viewers, interactions, and shares, crowdfunding campaigns have taken major steps as a funding technique for people or businesses looking to explore opportunities that may be infeasible to fund by a single investor. Rather than pursuing an audience individually, crowdfunding allows all the information to be put out to your following and attract investors on a streamlined and centralized platform. The four types of crowdfunding allow for multiple opportunities through various funding techniques. Donation-based, Reward-based, Debt-based, and Equity-based crowdfunding present more opportunities for growth and new discoveries.


This article was also featured in our newsletter Bottom Line Vol. 24.

Garrett Majka

Garrett Majka

Staff Accountant

Garrett is a member of Cerini & Associates’ audit staff where he works with our education and school district clients. He also focuses his efforts on supporting and aiding the Audit Department in day to day obligations. Garrett has experience in accounting, auditing, and claims auditing. Garrett’s knowledge and experience allows him to provide specific services including system testing and analysis, as well as claims audit functions.

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