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Crowdfunding 101



Have you ever wondered “what is crowdfunding?”


Crowdfunding is an alternative form of financing; it is the practice of funding a project or business by raising money from a large number of people, now conducted via online platforms. Under this model, there are three different roles: the person/entity that proposes the idea and/or project to be funded, the individuals that support the idea, and the platform/organisation that brings both parties together.


The most common types of crowdfunding are: Reward crowdfunding and Equity crowdfunding. Other types include donation-based crowdfunding and debt-based crowdfunding.


Reward crowdfunding is when the business or project raises funds and the backers receives a non-financial reward in return. This allows a business to presell a product or service to launch their business concept without sacrificing equity. For example, a video game creator wants to launch a new video game, the backers invest money so the funds can help develop the game and in return the backers receive the game in-advance or for free once completed.


Equity crowdfunding is when a business is trying to raise capital without incurring debt in order launch or grow the business and in return the backers receive equity securities (shares) in the company. Due to the expectation of receiving a return on their investment, more in depth information (such as the company pitch and market research) is required.


Reward-based crowdfunding platforms include:

Equity-based crowdfunding platforms include:

It is important to note that depending on the platform one uses, different restrictions and rules will apply. For example, who is allowed to invest in a business/project or the minimum investment required. As well, for equity-based platforms, as they are dealing with securities of companies, they are regulated by the governing body in that country.


Below are some of the benefits and risks that could be associated with using crowdfunding:

Creator Perspective

Benefits:

  • Raises awareness

  • Audience Engagement – Makes them feel a part of the business

  • Receive early feedback

  • Low cost of capital

  • Investors can act as brand ambassadors

Risks:

  • IP infringement or ineligibility as required to release a lot of information publicly

  • Reputation – in case the project is unable to meet campaign goals/ failure

  • Fear of being perceived as a scam

Investor Perspective

Benefits:

  • Allows for spreading risk/ diversifying portfolio

  • Reduces the search and transactional cost of investing in early-stage companies

  • Opens the doors to neglected markets

Risks:

  • Reduces ability to conduct thorough due diligence

  • Fraud Risk

*This content is for information purposes only and should not be regarded as a recommendation of, or an offer to sell, or as a solicitation of an offer to buy, any financial product. You should consult your professional advisors to ensure this financing method is suitable to your specific needs.


We hope this article has provided useful insights and has allowed you to see crowdfunding as an alternative financing option.


If you have any questions or comments, please feel free to contact us at info@joycegrp.com


Thanks for reading!

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