July 27, 2023 · 4 Minutes
A Beginner’s Guide to Crowdfunding
In recent years, crowdfunding has emerged as an innovative way for individuals and businesses to raise capital for their projects or ventures. It has gained popularity due to its potential to democratise finance and provide opportunities for collaboration between businesses and investors.
What is Crowdfunding?
Crowdfunding can be described as a collective effort by a group of individuals, often facilitated through online crowdfunding platforms, to raise capital for a specific project or venture. Rather than relying on traditional financing methods, such as bank loans or venture capital, crowdfunding allows project owners to reach out to a large number of investors who individually invest small amounts of money in the project.
Types of Crowdfunding
The European Crowdfunding Regulation (EU 2020/1503) defines “crowdfunding service” as the matching of business funding interests of investors and project owners through the use of a crowdfunding platform. The European Crowdfunding Regulation distinguishes between two types of crowdfunding:
- the facilitation of granting of loans (a.k.a. lending-based crowdfunding);
- the placing, without a firm commitment basis, of transferable securities and admitted instruments for crowdfunding purposes issued by project owners or a special purpose vehicle, and the reception and transmission of client orders in relation to those transferable securities and admitted instruments for crowdfunding purposes (a.k.a. Investment-based crowdfunding).
Lending-based crowdfunding is also known as peer-to-peer lending or crowdlending, where the investors provide loans to project owners. These loans are expected to be repaid over time with interest.
Lending-based crowdfunding allows individuals and businesses to access financing without going through traditional financial institutions, enabling greater flexibility and funding speed.
Investment-based crowdfunding involves investors investing in a project in exchange for financial returns that depend on the project’s success.
In equity crowdfunding, investors invest in the equity of the project owner and become shareholders of the project. The investments are returned at the end of the project, and investors will participate in the project’s profit sharing.
Benefits of Crowdfunding
Crowdfunding provides great benefits for investors.
Diversification of Investment Portfolio
Crowdfunding allows investors to diversify their investment portfolio by allocating funds across various projects. Instead of relying solely on traditional investment options, crowdfunding allows individuals to spread their risk and potentially maximise their returns by investing in various projects.
Access to Alternative Investment Opportunities
Crowdfunding platforms provide investors with access to unique investment opportunities that may not be available through traditional channels. Investors can discover innovative startups or attractive real estate development projects that align with their interests and values. By investing in these projects, investors support them and reap the benefits of their success.
Potential for High Returns
Investment-based crowdfunding offers the potential for attractive financial returns. By investing in projects or ventures, investors become stakeholders and can benefit from the project’s success. If a project achieves significant growth or profitability, investors may receive dividends, a share of the profits, or realise capital gains when selling their equity.
Accessibility and Flexibility
Crowdfunding platforms democratise investment opportunities by making them accessible to a broader range of investors. Individuals with smaller investment budgets can participate in projects that interest them, which might not be feasible through traditional investment avenues. Moreover, crowdfunding offers flexibility regarding investment amounts, allowing investors to contribute smaller sums and build their investments over time.
Involvement and Transparency
Crowdfunding platforms often foster engagement and transparency between investors and project owners. Investors can actively participate in the project’s journey, receive regular updates, and contribute feedback. This direct involvement provides a sense of connection and a deeper understanding of the project’s progress and challenges, enhancing the overall investment experience.
Engaging in Impactful Investing
Crowdfunding allows investors to align their investments with their personal values. They can choose to support projects that positively impact society, such as sustainable initiatives, social enterprises, or community-driven projects. By investing in ventures that aim to make a difference, investors can contribute to positive social and environmental change while pursuing financial goals.
Crowdfunding provides investors with a wide array of benefits, including portfolio diversification, access to alternative investment opportunities, the potential for high returns, and the ability to engage in impactful investing.
By participating in crowdfunding campaigns, investors can support innovative projects, contribute to positive change, and potentially realise financial gains while actively participating in the journey of the ventures they support.