Crowdfunding, noun and verb: When a group of individuals get together via the internet to pool their financial contributions to support a person or an organization. Crowdfunding can support a rock band, a startup company, scientific research, an artist, a journalist, or a political campaign. The term itself is credited to blogger Michael Sullivan in 2006.
The first instance of crowdfunding was to support the British band Marillion in 1997. Marillion’s adoring fans got together and donated $60,000 via the internet so the band could go on tour. It wasn’t until 2001 that ArtistShare, the first true crowdfunding website, appeared. ArtistShare was followed by a series of artist-focused crowdfunding websites like KickStarter, GoFundMe and PleaseFund.Us.
Crowdfunding Versus Crowdsourcing
Crowdfunding and crowdsourcing are sometimes used interchangably, but there is a significant difference between the two terms. This is often the first question you’ll get when you are talking to someone about this crowdfunding thing you’re interested in. You’ll get a puzzled look, and then your friend will ask “Is that like crowdsourcing?” It is, but with a difference. The common definition of crowdsourcing is when a group of people gets together and does anything online – builds a site, plans an event, or even writes a cooperative novel. Crowdfunding is when a group funds something, ie, gives money. So crowdfunding is a kind of crowdsourcing.
Crowdfunding and the JOBS Act
Crowdfunding has been coming up in more and more conversations ever since April 5th of 2012, when the JOBS Act was signed into law. Part of the JOBS Act was to direct the SEC to spell out the details of crowdfunding law by Dec 31st. Unfortunately, it looks like the SEC may not make that deadline, but crowdfunding is gaining so much momentum that it seems to not even need the approval of the SEC to spread.
This spread is due in part because existing crowdfunding platforms like Kickstarter and Indiegogo are already underway, funding hundreds of new projects and people every day. While the rules about what happens if a project fails are unclear, and the funding guidelines are not being followed too closely, the game is on, and more players join every day.
Crowdfunding Versus Donations
Another powerful factor driving the growth is that these crowdfunding recipients do not have to give up equity in their projects when they raise money. The down side is that investors can not earn anything on their investments, as with a traditional equity purchase. Right now investors are really just donating their money, or, at most, getting on a list for free products and perks from the entity they are funding. That’s not a long way off from just donating to a cause, which is fine, but the promise of crowdfunding is still waiting to be realized.
While crowdfunding goes viral and develops at a hyper rate through the existing platforms, a lot of people are still holding their breath to see how the SEC and it’s sister agencies will define the bounds of crowdfunding. The SEC has postponed their review of the JOBS Act several times, and may do so again several more times. Making the December 31st deadline – now 3.5 months away – seems unlikely, though Washington has a history of holding things up until the very last moment.