Crowdfunding is the collective effort of individuals who network and pool their resources, usually via the Internet, to help fund or start a business, project or cause.
In recent years, crowdfunding has become a growing alternative to traditional investment techniques. The amount of money raised by crowfunding grew from $1.5 billion in 2011 to $2.8 billion in 2012.
Its difference between crowdfunding and traditional capital venture that make it an attractive alternative:
- It allows a company to find funding at a lower cost.
- It allows for more creative and non-traditional ideas, who might be too risky for capital ventures, to find the necessary funding.
Crowdfunding has gain much more recognition with a couple of high profile projects that raised millions of dollar. Two movie projects Veronica Mars and Wish I were Here respectively raised $5.7 and $3 million on Kickstarter, one of the main crowfunding site.
However, compared to capital ventures, crowdfunding remains a much less stable ressource.
The status of crowd investors remains however vague. The JOBS Act signed by President Obama in 2012 had a section dedicated to issue of crowfunding and would have allowed small companies to sell shares over crowdfunding platforms.
The JOBS Act will apply to companies raising $1 million or less with investors investing up to $2,000. But the SEC has yet to formalize the rules allowing this to happen.
In the meantimes, companies raising money through crowdfunding are using other incentives to convince investors to invest in there project. These incentives vary from tee-shirts, prototypes, behind the scene footages to meeting the team behind a project.
This has been successful so far but to become a true alternative investment method, the SEC will have to establish the rules that will regulate that new industry.
The following infographic was provided by Best Accounting Degree.net.