Crowdfunding

Crowd funding (sometimes called crowd financing or crowd sourced capital) describes the collective cooperation, attention and trust by people who network and pool their money together, usually via the Internet, in order to support efforts initiated by other people or organizations. Crowdfunding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns.

History

The crowd funding approach has long precedents in the sphere of charity. It is receiving renewed attention from both commercial and social entrepreneurs now that social media, online communities and micropayment technology make it straightforward to engage and secure donations from a group of potentially interested supporters at very low cost.

The first application of crowdfunding in the media and artistic industry dates back to 2004, when french entrepreneurs and producers Guillaume Colboc and Benjamin Pommeraud from company Guyom Corp. launched a public internet donation campaign to fund their film, Demain la Veille (Waiting for Yesterday). Within 3 weeks, they managed to raise nearly $ 50,000, allowing them to shoot their film.

Crowdfunding's earliest known citation was by Michael Sullivan, fundavlog, August 12th, 2006, "Many things are important factors, but funding from the 'crowd' is the base of which all else depends on and is built on. So, Crowdfunding is an accurate term to help me explain this core element of fundavlog."

Earlier, other and related definitions

Some advocate that crowdfunding does not include investments, and only includes the categories of donations, memberships or pre-ordering of products, giving none of the contributors a future stake or monetary reward of any kind.

Micropatronage is a system in which the public directly supports the work of others by making donations through the Internet. In use as early as 2001, the term was popularized in 2005 by blogger Jason Kottke when he quit his day job as a web designer and spent a year blogging full time, living off the voluntary donations of his readership. Micropatronage differs from traditional patronage systems by allowing many "patrons" to donate small amounts, rather than a small number of patrons making larger contributions.

In webcomics, micropatronage plays a large part in supporting both the author and the site itself, and it has become common in webcomics to see authors asking for donations from fans beyond a certain level of popularity.

Contemporary applications

Crowd funding is being experimented with as a funding mechanism for creative work such as Blogging and Journalism, Music, and independent film., and also for funding a Startup company. As far as music is concerned, community labels have seen the light. They are usually for-profit organizations that allow fans to "assume the traditional financier role of a record label for artists they believe in by funding the recording process". In Europe, examples include Sellaband[1], created in Holland in 2006 and considered the first one. Others then followed, such as MyMajorCompany[2] in France (created in december 2007, popularized by Gregoire's hit "Toi+Moi" in the summer 2008) or Akamusic[3] in Belgium (created in 2008).

Approaches

An entrepreneur seeking to use crowd funding (example for seed money) typically makes use of online communities to solicit pledges of small amounts of money from individuals who are typically not professional financiers. A range of variations are possible, for example:

• The solicitation could be to back an idea with no direct material return offered to those making a pledge. This type of crowd financing has long precedents including artistic patronage and the normal activities of charity fundraising. Sometimes a threshold pledge approach is used, in which all pledges are voided unless the threshold amount is reached before the deadline.
• Another approach invites a display of sponsorship in return for the cash pledged. A widely documented internet-based example is The Million Dollar Homepage.
• The solicitation could be to offer a loan (microfinance).
• Some kind of quasi-equity investment could be offered, though any such scheme would need to avoid falling under any applicable financial regulations regarding making an initial public offering. One of such schemes was introduced on Feb. 2010

Pros and cons

Proponents of the crowd funding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd. If it does achieve "traction" in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth promotion.

Against these advantages is the requirement to disclose the idea for which funding is sought in public when it is at a very early stage. This exposes the promoter of the idea to the risk of the idea being copied and developed ahead of them by better-financed competitors.

Another significant downside to crowd funding is the possibility of getting ensnared in various securities laws, since soliciting investments from the general public is most often illegal unless the opportunity has been filed with an appropriate securities regulatory authority, such as the Securities and Exchange Commission in the U.S., the Ontario Securities Commission in Ontario, Canada, the Autorité des marchés financiers in France and Quebec, Canada, or the Financial Services Authority in the U.K. These regulators can have different ways of determining what is and what is not a security but a general rule one can rely on (at least in the U.S.) is the Howey Test. The Howey Test says that a transaction constitutes a investment contract (therefore a security) if there is (1) an exchange of money (2) with an expectation of profits arising (3) from a common enterprise (4) which depends solely on the efforts of a promoter or third party. Clearly, under this standard, any crowd sourcing arrangement in which people are asked to contribute money in exchange for potential profits based on the work of others would be considered a security. As such, the applicable investment contract would have to be registered with a regulatory agency (such as the S.E.C.) unless it qualified for one of several rule-laden exemptions (e.g. Regulation A or Rule 506 of Regulation D of the Securities Act of 1933, or the California Limited Offering Exemption - Rule 1001 (also known as S.E.C. Rule 1001)). The penalties for a securities violation can vary greatly and depend in large part on the amount of profit obtained by the "promoter," the damage done to the investors, and whether a violation is a first time offense. However, a violation may result in both civil and criminal penalties, a return of any profit made and sometimes a lifetime ban from work in the securities industry. According to Section 5 of the Securities Act, it is illegal to sell any security unless such a sale is accompanied or preceded by a prospectus that meets the requirements of the Securities Act.

Of course, an upside to registering a security with a regulatory authority is the sense of legitimacy that is imparted by application of a rigorous legal regime.

See also

• Threshold pledge system
• Crowdsourcing
• Crowd psychology
• Crowd wisdom

Further reading

• A Guide to Crowdfunding Success
• Pbworks crowdfunding wiki
• The Kapipalist Manifesto, Principles of Crowdfunding
• Crowdfunding In the News
• Crowdfunding New York Times
• Ex Ante Crowdfunding and the Recording Industry: A Model for the U.S.?
• Partial list of crowdfunding websites
• Age of Stupid and crowdfunding success
• Huffington Post crowdfunding blogs
• Independent films new path
• (German original)The future of paid content, Carta.info, (Google English translation)
• Cash-strapped entrepreneurs get creative in BBC News