What Is Crowdfunding?
Crowdfunding is a manner of raising funds through the Internet by asking the crowd or the public for contribution as a way to support a specific cause, artistic project, a political campaign, or a business venture. In most of these projects the contribution amounts could vary, and may run anywhere from a dollar to hundreds of thousands or even millions.
Crowdfunding, which may also refer to the act of fundraising for a company by selling small equity amounts to investors, obtained legal approval in 2012 through the JOBS Act or the Jumpstart Our Business Startups Act, a law designed to put fewer federal regulatory burdens on start-up companies. Under the JOBS Act provisions, the Commission should have already proposed its plan on December 31, 2012. Last month, the SEC finally put forward a set of rules that will oversee the matter, after a delayed period of about more or less a year.
According to the Commission, they will be accommodating public comments on the proposed rules for a period of 90 days, after which they will review the comments and settle on a decision to modify or approve the rules. It is expected for these crowdfunding rules to be finalized on February 2014.
The History of Crowdfunding
While crowdfunding obtained legal recognition only in 2012, the term has been known to be first introduced in 2006 by Michael Sullivan in an effort to crowdfund for a video blogging network.
Nonetheless, pooling resources for any specific campaign or charitable purpose has been in practice for a long time, when non-profit organizations would obtain funds from the general public. In 1884, for instance, Joseph Pulitzer of the New York World completed a fundraising campaign for the American Committee for the Statue of Liberty worth $100,000 from at least 12,500 individuals within a period of six months.
Experts say crowdfunding is also traceable to the practice ofcrowdsourcing, wherein services may be solicited from various individuals within an online community instead of sourcing them in-house or from traditional suppliers. There is no clear evidence that point to the very first crowdfunding project, but many websites like Kickstarter, Prosper, and Indiegogo have already been created to pave way for these capital funding requests.
- Financing options are no longer limited to financial institutions or intimidating venture capital firms. With crowdfunding, start-ups are able to pool the needed capital without having to accommodate a lot of debt or give up equity altogether.
- Gaining marketing validation is often a challenging goal to accomplish for many entrepreneurs. Since a crowdfunding campaign introduces the venture and raises awareness, financial and market risks are easily seen, managed, or altogether minimized.
- Because this manner of capital fundraising includes an entire community, and not just a select circle of venture capital firms and banks, it already serves as an effective marketing tool in itself. For entrepreneurs, this already presents an opportunity for them to introduce the mission and vision of their respective start-ups and to promote their campaign while generating capital.
- Crowdfunding facilitates the exchange of comments, suggestions, and reactions so that entrepreneurs are able to gain feedback even at the early stages of the campaign. And it’s not difficult to meet long-term supporter along the way. Entrepreneurs can expect support from people who have faith in the project from the very beginning. And since investors care about where their money is going, they are bound to give honest feedback on the campaign, making it a virtually win-win situation for everyone.