Examining The Broad Use Of The Term “Crowdfunding”

A new method of capital raising that is gaining increasing interest is crowdfunding. Generally, the term “crowdfunding” is used to describe a form of capital raising whereby groups of people pool money, typically comprised of very small individual contributions, to support an effort by others to accomplish a specific goal. This funding strategy was initially developed to fund such things as films, books, music recordings, and charitable endeavors. At that time, the individuals providing the funding were more akin to contributors than “investors” and were either simply donating funds or were offered a “perk,” such as a copy of the related book. As these capital raising strategies did not provide an opportunity for profit participation, initial crowdfunding efforts did not raise issues under the federal securities laws.Meredith Cross, in SEC testimony

Crowdfunding“Crowdfunding” as a term tends to be very broadly applied. The term is often given to any form of online-enabled finance where a large group of individuals (a crowd) is giving money to a single recipient. (a project creator, issuer, debtor, etc.)

Up to now, there are four generally-accepted forms of crowdfunding: donation, rewards, lending and equity. These can be further broken down into two groups: investment crowdfunding (CircleUp, Seedrs, Prosper) and donation crowdfunding (Rally, Kickstarter, Crowdtilt).

However, some take issue with this way of categorizing platforms. A recent post at Venture Capital Post outlines a recent disagreement between Peer-to-Peer Finance Association Chair Christine Farnish and Julia Groves, the Chair of the UK Crowdfunding Association. The discrepancy was outlined in a post in the Financial Times as well.

Farnish says that lumping P2P lending and equity crowdfunding under one taxonomy is more a matter of convenience than correctness, and she is concerned that this could confuse investors in the future. Groves takes issue with this assertion. “Any suggestion that crowdfunding is just about taking equity in early-stage businesses is both unhelpful and entirely inaccurate,” Groves said.

SEC Headquarters in DCThis same issue came up at the recent SEC Government-Small Business Forum On Small Business Capital Formation in Washington, DC. In the afternoon breakout session we were reminded of where the SEC came down on the issue. A previous comment from former SEC Director of the Division of Corporation Finance Meredith Cross clarified that the SEC does not own the term crowdfunding.

The same could be said for the platforms. In reality, nobody owns the term. If an entrepreneur wants to call their business “crowdfunding” they’re free to do so, although the rules and regulations that company is subject to may differ depending on focus. Individuals may be donating on marketplaces calling themselves crowdfunding platforms. They may also be investing or lending on sites calling themselves the same. This is the complex reality of the space.

For this reason, anything less than a broad application of the term seems an exercise in futility. In the end, it is up to the platform to differentiate any way they see fit and up to the crowd to interpret any way they see fit as well.

P2P lending platforms have been notably hesitant to want to adopt the “crowdfunding” moniker. For example, Lending Club has a blog post tackling the issue of whether they’re a crowdfunding platform. Their answer is no. Still, many recognize them as a crowdfunding play. (We certainly cover them like one.) Also, remember that $5.1 billion number from Massolution’s research last year? That was primarily made up of funding driven from “lending-based crowdfunding” platforms like LendingClub.

It’s also important to note the distinction between the general terms “platform” and “marketplace” versus the term “portal,” which is a specifically defined term in the JOBS Act. A crowdfunding portal is narrowly defined. Terms like “platform” and “marketplace” are more generalized umbrella terms, because we dare not use the word “store.”

Getting confused yet? There are a lot of moving parts here, and there is certainly an education component that becomes even more critical when the term crowdfunding is applied to so many varying companies with different capital formation plays. Education is one of the biggest challenges the crowdfunding space faces. The real question is how does the application of the term crowdfunding really affect that educational push?

What do you think? Is crowdfunding as a term applied too broadly?

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