Getting to know crowd funding as a financing alternative
During these credit crunch crisis times, Crowd funding could be a good way to get capital for new creative idea or project. It requires a good concept, adequate preparation, an existing and expanding community and a little bit of luck to take off and succeed. There are many success stories that the reality can often be a surprise.
Crowd funding is an emerging alternative form of financing that connects directly those who can give, lend or invest money with those who need funding for a particular project. It usually refers to open calls through the internet to the wider public to finance specific projects.
Promoters of the initiative can collect funds directly. However, a web-based intermediary, a so-called 'crowd funding platform', will often assist in publishing campaigns and collecting funds. In exchange, these platforms often charge a fee. While calls for funds to the public are not new, the phenomenon of using the internet to directly connect with funders has emerged recently and brought significant visibility to the practice.
Is it donations or investments?
Crowd funding is not a homogenous concept. It can be used by different models of financing:
- donations are simple monetary contributions to help realise a project where nothing is offered in return
- rewards-based crowd funding where those who contribute with money to the campaign get something in return, e.g. the cultural experience of appearing as an extra in the film they helped to finance
- pre-sales campaigns collect funds from the crowd to develop and produce a new product that will be shipped to the contributors
- crowd-lending refers to a campaign that borrow money from the crowd and promise to pay it back on set terms either with or without interest.
- crowd-investing can take the form of profit sharing arrangements or investments into securities (debt or equity) issued by the firm that launched the campaign.
The two main categories to be distinguished are crowd funding with non-financial returns (donations, rewards and pre-sales) and crowd funding with financial returns (crowd investing and crowd lending). The main difference between these two lies in the potential financial profit the latter model can offer and the particular investment risks attached to it.
For further information: http://europa.eu/rapid/press-release_MEMO-14-240_en.htm?locale=en
See also IP/14/320
