Getting Money from the Crowd – Part 2 [Crowd-funding vs. Crowd-sourced Equity]

Mention crowd-funding and most people think of Kickstarter. If it is mentioned in the same breath as investing with values, Kiva might come to mind. People with projects and start-up businesses start to wonder if crowd-funding is a solution for their funding and financing gap.

“Fund & Follow Creativity” reads the Kickstarter tagline. The business describes itself as “a funding platform for creative projects” and it began as a patronage service for artists and creatives. Kickstarter’s expressly notes in its user guidelines that it is for funding projects only and that “starting a business, for example, does not qualify as a project.” Project creators provide perks and rewards for different amounts of pledges made. By providing tangible rewards that are not location-specific, project creators can reach a much wider audience that might be interested in supporting their project. However, in some corners of the platform, it has evolved into a place where product designers are pre-selling their products. The promise of an inventive new product is the reward for pledging money. For these “projects”, a Kickstarter campaign forms part of their customer discovery and development strategy by helping creators gauge demand from early customers.

People who part with their money on Kickstarter are supporters or consumers, but they are not investors. They are getting something in return for their pledge or donation, but there is no financial return nor do they get a share in the future success of the projects they back. This kind of structure means that the project creators are not subject to securities laws which typically apply to companies raising investment capital and supporters do not have to be accredited investors. Raising investment capital from accredited investors is described in greater detail below where I explain crowd-sourced equity.

Raising money through pledges and donations rather than as investment is simpler for both the project creator and the supporter, with only the merits of the project needing to be communicated. Any risk associated with the money is clear: you’ve parted with your money and you’re not getting it back. There is risk that the project is not completed, that the outcome of the project is not as expected, or that the perks and rewards are not delivered. This type of risk is comparable to the risk of losing your money by buying something through an e-commerce site on the internet that does not deliver the goods or services you purchased or does not meet your expectations.

Kiva also organizes money from the crowd and directs it towards microfinance institutions, which in turn finance microenterprise and projects. People who give money through the Kiva platform are called lenders. They may get their original Kiva loan back, but they do not get any interest paid on their loans. Similar to Kickstarter, Kiva patrons do not get any financial return. It is an interesting model because the principal amount of the loans can be loaned and repaid and loaned again, thereby augmenting the impact achieved by lender’s money.

Crowd-sourced equity is a different activity and financing model altogether. To begin to understand the difference between crowd-funding and crowd-sourced equity, you need to understand some of the legal limitations. Investments which involve an interest in the future success of a company and a financial return to the investor are subject to securities laws, which may differ from country to country and region to region.

Most commonly, companies are required to issue a prospectus to prospective investors. The prospectus is a document that details the risks and the rewards of the investment opportunity. The intention of the prospectus is to protect investors from scams and false offerings. Small companies and start-ups often make use of an exemption to avoid issuing a prospectus, which can often be prohibitively expensive. One exemption is to raise money from friends and family. Another common exemption is raising money from accredited investors. Accredited investors are typically defined under securities laws for a particular country, state, or province and need to have a certain level of income and personal net wealth. They are considered able to evaluate and make direct investments in companies without the company issuing them a prospectus.

MicroPlace is an example of an online platform for sourcing investment capital from a crowd. It was founded in 2006 and is a registered online broker/dealer that crowd sources investment in microfinance projects that do provide a potential financial return to investors. MicroPlace makes its microfinance investment opportunities available to the general public. Each project on its platform issues a prospectus and potential investors are encouraged to read the prospectus to fully understand the risks before investing.

In our next post, we’ll take a look at the opportunities and pitfalls of online crowd-sourcing equity and capital-raising and what this all means for people seeking capital and people looking for places to invest their money.

Other resources:

Mike Volker on Capital Prohibitions and Crowdfunding
There is now even an organization that is providing accreditation to crowdfunding platforms. Check whether the platform you’re considering using is part of this movement.

Register for Let’s Talk About Crowdfunding and hear from 5 guest speakers about their perspective on sourcing money from the crowd. The event is part of a series of Conversations for Investing with our Values hosted by Pique Ventures. August’s event is co-hosted with the Canadian Global Impact Investing Group.

This series of posts: