What's the Deal With Crowdfunding?

It's been estimated that individuals raised $5.1 billion in crowdfunding campaigns over 2013.

$5.1 billion… really? When you think of the plethora that is crowdfunding, it makes much more sense.

Crowdfunding is diverse. Over the last few years it has helped raise capital for quality public education like Chicago’s Academy for Global Citizenship, to LA-based artist Brandon Bird’s goal of painting “the greatest Sears stores in the country”, to health care apps like Iodine which “mines clinical data to help consumers make better decisions about drugs… driving better adherence and better outcomes”.

There are two types of crowdfunding. The first is the ‘donation based’ model that has been the cornerstone of its evolution. Funders donate to a campaign collaboratively with the goal of seeing a return for products, perks or rewards. The second ‘investment funding’ model in which businesses in search of raising capital can sell stakes online in the form of equity or debt. Funders then become owners or stakeholders and have the potential for financial return.

But don’t get too excited, the latter is currently only open to accredited investors. Title III of the Jobs Act (predicted to pass by the end of 2014), will broaden the opportunity for non-accredited investors to help fund startup businesses while buying their very own stake in company profits. However, there will be strict regulations and guidelines in place. Companies looking to raise capital will see an expensive tax with any goal to raise over $500,000. Prospective ‘investors’ will most likely see a $2,000 limit or a maximum 5% earnings of the company’s annual income, making it difficult to diversify one’s portfolio to protect from volatility.

There has been a bit of negativity surrounding the ability for non-accredited investors to help fund hopeful companies. As the former SEC chief accountant Lynn Turner put it, “What we are talking about are companies that in all likelihood are not going to be winners, and they are being invested in by people who clearly don’t have the expertise and financial smarts of venture capitalists.” Fair enough. But it seems to me that average Joes investing in private securities is a lot like going to the casino, or betting on sports. I suppose we could all apply what my 7th grade History teacher engrained in me to any level of investing: “Research, research and research. And when you think you’re done, do some more".

So what trends will crowdfunding see in 2014? With the realm’s success, reach and variety, I think more and more people will become comfortable with crowdfunding platforms and donating to causes and campaigns they align with. I foresee budding areas to include :

  • infrastructure and educational growth in developing countries
  • health care technology, especially apps
  • clean technology and alternative energy products

Unfortunately, I think we can also anticipate a greater level of fraud over crowdfunding platforms on an international level. But that's when it is time to apply one's grade-school research habits to any act of support.

By Carly Sewell