Crowdfunding - a report by Adeoluwa Adeniyi September 2012

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1 C H A R T E R E D A C C O U N T A N T S Digital and Creative Sector: Crowdfunding - a report by Adeoluwa Adeniyi September 2012 F O R W A R D T H I N K I N G P E R S O N A L D I F F E R E N T

2 Crowdfunding Crowdfunding as a business tool was originally designed as a way to fund mostly unprofitable creative projects such as films, band tours and album recordings. Even though the concept of crowdfunding (pooling together the resources of many private individuals for a cause) has been in existence for ages, its use as tool for businesses to raise capital, especially in the current financial climate is a relatively new one. It has now begun to evolve over the last couple of years, and is beginning to spread well beyond creative businesses and projects to include all kinds of businesses, entrepreneurs, and projects. The basic concept behind crowdfunding is simple. Many private individuals collectively investing relatively small amounts (compared to the amount traditional venture capitalists invest) of money in an idea, business (start-up or expanding), or project, and it is usually done via the internet. Over the past couple of years, crowdfunding has started to garner plenty of attention from entrepreneurs, small business owners, and even policymakers, as they begin to see it as a replacement for specialized grant applications or other more formal and traditional fundraising techniques. The way crowdfunding works is a business or entrepreneur will explain their plans or project with a pitch via the internet, in order to try to attract contributions from as many individuals as possible. Investors can then contribute as little as 10 in a business or to a project, usually with no upper limit. Most crowdfunding platforms give the pitchers a limit on the amount of time they have to raise a target amount of money. For instance, an individual who wants to raise 5000 for a project or to start or expand a business may be given 2 months to reach the 5000 target. If by the end of the 2 months the required amount has not been reached, all the monies will be returned to the individuals who have already contributed to the fund. This model of crowfunding is known as all-or-nothing. In some other crowdfunding platforms however, the businesses or entrepreneur is allowed to decide whether or not to return money to the investors even if the target amount of money is not reached within a period of time. This model is known as the keep-it-all model.

3 There are four main kinds of crowdfunding: Charity-crowdfunding Debt-crowdfunding Rewards-crowdfunding Equity-crowdfunding Charity-crowdfunding is usually carried out by organizations like the Red Cross, or the Salvation Army, and is usually a campaign requesting individuals to donate money for a cause, often a disaster. This kind of crowdfunding has been in existence for a long time. The second kind of crowdfunding is debt-crowdfunding. This could also be form of peer-to-peer investing. Here the crowd of individual investors (as opposed to banks) lend funding to other individuals or businesses at an agreed interest rate. The third kind of crowdfunding and the most popular kind is the rewardscrowdfunding. What happens in this type of crowdfunding is the business owner or entrepreneur gives specific rewards to the individuals who fund them. Usually, the rewards are in the form of the product or service the entrepreneur or business plans to create. For instance, a music artist that needs funding to produce an album could give rewards ranging from a copy of the album to a live performance by the artist at a requested venue, depending on how much the individual donates. The last kind of crowdfunding is equity-crowdfunding. With this type of crowdfunding, the idea is that individuals who fund a business receive equity in the business and become shareholders in the business. The biggest challenge facing entrepreneurs and businesses planning to use crowdfunding as a means to fund their projects, ideas, or businesses is the issue of intellectual property exposure. There is hardly any intellectual protection provided by many crowdfunding sites and platforms, creating the risk that an idea in the form of a pitch can be stolen and used by individuals with the necessary funds. Also, for investors looking to crowdfunding as an alternative to volatile markets and low interest rates, there is a huge risk of fraud. In recent

4 times the FSA has warned investors of fraud, and at the moment only one crowdfunding website, Seedrs is currently authorised and regulated by the FSA. There is however, an international accreditation association called Crowdsourcing.org, which gives accreditation based on certain laws and guidelines to crowdsourcing platforms, even though there are still a number of legitimate crowdfunding platforms out there that don t have this accreditation. Since the concept of crowdfunding for businesses is a relatively new one, there are no clear cut tax laws regarding crowdfunded money at the moment. Since business owners and individuals raising the money are responsible for the money raised, they need to be aware of how taxes can be applied to crowdfunded money and will need an expert to help in this area. Investors however could be able to get some form of tax relief if the business is SEIS or EIS compliant. Here are a few crowdfunding platforms: IndieGoGo is an online social marketplace connecting filmmakers and fans to finance independent films. The platform provides filmmakers with tools for project funding, recruiting, and promotion; while enabling the audience to discover and connect directly with filmmakers and the causes they support. ( Bandstocks provides a financial model for artists seeking an alternative to major labels. Funds for production and promotion are raised through band stocks purchased by fans in 10 units. Investors receive a copy of the album plus royalties from sales. ( ArtistShare is a service for musicians to fund their projects outside the normal recording industry. It utilises micropayments to allow the general public to directly finance, and in some cases gain access to extra material from an artist. ( ) Kickstarter is a New York start-up that helps other projects raise small amounts of finance through crowdfunding. ( )

5 Seedrs are the only UK based crowdfunding platform that has been authorised and regulated by the FSA. ( ) Symbid is the first equity-crowdfunding platform that enables individuals to directly invest in start-ups or existing ventures in exchange for an equity stake in the company. Symbid s crowdfunding model is the first of its kind providing a new way for small and large investors to directly invest in equity-based ventures. Investors become partial owners once the new company has managed to achieve its stated funding. ( ) Sponsume is a free and open fundraising platform for creative projects based in the UK and Europe. Unlike most crowdfunding sites, Sponsume does not charge a success fee or any other fee. Sponsume welcomes applications from individuals and organisations for artistic, entrepreneurial and social projects. ( ) Cameesa is the first site breaking into 'Crowdfunding Fashion' where it encourages participation in the clothing creation process. Members decide which designs to print on T-shirts by supporting them financially. Once a design is 100% funded, the members who supported the design, get a special edition of the t-shirt and earn everytime it is sold. ( )