Crowdfunding Hot or Not?

Crowdfunding enjoyed an 81% increase on the previous year and these websites helped companies and individuals worldwide raise $2.7 billion from members of the public in 2012.

What is “Crowdfunding”? Many websites now offer small investors the opportunity to earn interest from lending money either to individuals or small businesses, while others allow people to invest as little as 10 pounds ($15) in companies in return for an equity stake.

As crowdfunding is relatively new, there is no data yet on failure rates or average returns on equity investments. “It can be difficult to make returns investing in early stage businesses, but crowdfunding adds flexibility as it opens companies up to a broader base of investors who may not be investing solely for a return,” said Liam Collins, policy advisor at Nesta, a charity which promotes innovation. Generous tax breaks in Britain for investing in seed stage firms also make equity crowdfunding an attractive option.

There is no Europe-wide regulation in place specific to crowdfunding websites and the United States is in the process of drafting rules that would govern the sector. The Securities and Exchange Commission needs to adopt rules before small businesses can sell securities to investors through crowdfunding.

No one can now plausibly deny that crowdfunding (be it equity, donations or rewards-based) is not filling a crucial gap in capital formation for businesses, social impact, and communities.

So while there may be more political battles to come, crowdfunding is booming, and enterprising small businesses and nonprofits can still leverage their social networks to fund today’s most pressing causes and tomorrow’s most innovative ideas with donations and rewards campaigns. Investor protection and fraud prevention are top priorities not only for regulators, but for those deeply involved in the industry.

Do you have “Crowdfunding” information or experiences to share?

Information from Elizabeth Smith Kulik, co-founder and CEO of ProHatch.