Everything about Crowdfunding

Crowdfunding types – Are we talking about donations or investments?

Crowdfunding is not a homogenous concept. It can be used by different models of financing. The two main categories to be distinguished are:

  • Crowdfunding: Crowdfunding with non-financial returns (donations, rewards and pre-sales) and
  • Crowdinvesting: Crowdfunding with financial returns (equity-based and lending-based)

The main difference between these two types of Crowdfunding is the potential financial return which the project offers to the investor.

Oxford Dictionary defines Crowdfunding as “the practice of funding a project or venture by raising many small amounts of money from a large number of people (also known as the “Crowd”), typically via the Internet.”

 

Crowdfunding usually takes place via an online platform.

Platform: is a website, which facilitates Crowdfunding by allowing people or companies seeking money to raise it from members of the public. Platforms list different projects, handle the financial transactions involved, and may also provide services such as media hosting, social networking, and facilitating contact with investors or interested public. The 2nd European Alternative Finance Industry Report 2016 identifies a total of 10 current alternative finance model types (see Table 2).

Table 2: 10 current alternative finance model types

ALTERNATIVE FINANCE MODEL DEFINITION
Peer-to-Peer Consumer Lending Individuals or institutional funders provide a loan to a consumer borrower.
Peer-to-Peer Business Lending Individuals or institutional funders provide a loan to a business borrower.
Equity-based Crowdfunding Individuals or institutional funders purchase equity issued by a company.
Reward-based Crowdfunding Backers provide finance to individuals, projects or companies in exchange for non-monetary rewards or products.
Invoice Trading Individuals or institutional funders purchase invoices or receivable notes from a business at a discount.
Profit Sharing Crowdfunding Individuals or institutions purchase securities from a company, such as shares or bonds, and share in the profits or royalties of the business.
Real Estate Crowdfunding Individuals or institutional funders provide equity or subordinated-debt financing for real estate.
Donation-based Crowdfunding Donors provide funding to individuals, projects or companies based on philanthropic or civic motivations with no expectation of monetary or material return.
Debt-based Securities Individuals or institutional funders purchase debt-based securities, typically a bond or debenture at a fixed interest rate.
Balance Sheet Business Lending The platform entity provides a loan directly to a business borrower.

Source: https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2016-european-alternative-finance-report-sustaining-momentum.pdf

 

For a detailed description of the 4 main Crowdfunding types “Donation-based Crowdfunding, Reward-based Crowdfunding, Equity-based Crowdfunding and Lending-based Crowdfunding”, please click here:

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