Crowdfunding (alternately investment crowdfunding, securities crowdfunding, crowdinvesting, crowd financing, debt crowdfunding, crowdlending, equity crowdfunding, crowdsale, initial coin offering or security token offering) describes the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or businesses raise capital. Crowdfunding also includes Peer to Peer Lending or “Marketplace Lending” which combines institutional money with investments from smaller investors.
In China, the largest market in the world, the term Internet Finance is used encompassing all aspects of online capital formation and Fintech.
The term crowdfunding is sometimes used in support of a wide variety of activities but the preferred definition is for online investing activities for securities issuers seeking capital.
The United States
The United Kingdom
- FCA Publishes Final Rules For Crowdfunding In UK
Types of Investors
In the discussion of crowdfunding there are generally two types of investors in the United States: accredited investors and non-accredited investors. These two groups operate by differing rules when investing. In general, if you make less than $200,000 a year or are worth less than $1 million you are a non-accredited investor, although there are more complex rules that define these two groups.
The reason crowdfunding is an emerging topic in the United States is due to the JOBS act enabling non-accredited investors to invest in companies via crowdfunded offerings. This means average citizens can contribute capital to companies without those companies having to deal with the typical bureaucratic overhead of selling stock on typical stock exchanges.
The SEC has published a report on the definition of an accredited investor and may be inclined to update the rule.
Types of Crowdfunding
A platform may crowdfund a diverse group of securities including debt, equity, SAFEs, revenue share, convertibles or more. Each of these offerings entails an expected return by the investor. Investment crowdfunding is most widely utilized in raising capital for early-stage firms and real estate projects. As the technology matures, a growing number of later stage businesses are utilizing online capital formation.
Initial Coin Offerings (ICOs) and Security Token Offerings (STOs)
The advent of Ethereum fueled an entirely new class of investments. Digital assets may now be “tokenized” security offerings of debt, equity, or perhaps a new type of asset in its entirety. This sector of finance is very much in its infancy.
In 2017 and much of 2018, ICOs experienced dramatic growth. Regulatory actions around the world curtailed this activity as some jurisdictions deemed these offerings securities designed to skirt existing law. The emergence of STOs provides a regulatory compliant path for the issuance of securities using blockchain technology.