Crowdfunding is the practice of getting a large group of people to finance a project by using a website or other online tool to solicit funds. It falls, then, under the broader category of alternative finance, which refers to any use of the Web or social media to make transactions that used to be done mainly through banks.
Wordspy dates the first use of “crowdfunding” to 2006, but the concept goes far back into history. Because of this, subscription services, charitable donation drives and war bond issues all share similar traits to crowdfunding and clearly pre-date the internet.
Some crowdfunding campaigns offer an investment opportunity and some don’t.
Investments through crowdfunding can take many forms. It could be a straightforward equity stake or debt instrument. It could even be something like a forward contract, promising a share of a future payout from a lawsuit settlement or insurance payoff.
Charity is non-investment crowdfunding’s most obvious use case, but hardly its only one. Creative endeavors from books to visual arts to game design frequently rely on money advanced by supporters online. So do the equally creative work of medical research and business software development. Depending on the campaign, supporters might receive premiums, similar to the gifts given away by public broadcasting stations during pledge drives. In other cases, the financial support is an out-and-out donation made without any expectation of reward.
Initial coin offerings, which raise funds for cryptocurrencies and other blockchain-related ventures, might constitute a new crowdfunding model. Still, it’s prudent to wait until regulators determine if ICOs are really securities offerings before making that call.
Regardless of model, though, all crowdfunding campaigns rely on the same three types of participants:
- the initiator who proposes the project.
- supporters who fund it.
- the platform that connects initiators and supporters online.
Investment-based crowdfunding frequently funds projects in food and agriculture as well as real estate. Non-investment campaigns support philanthropy, civic projects and international development. Long-form journalism and scientific research might receive funds through either model.