The Logic Of Equity Based Crowdfunding
The term equity based crowdfunding is defined as a collective effort of people who will network with each other and pool their money in order to support situations that are initiated by others. Most of the sourcing is done on the Internet, as it is faster to contact networks of people that way. In some circles, this is also called crowd financing.
The term can also mean the funding of any venture using small amounts of equity that is sold to many investors. The policymakers in the United States are looking to potentially legislate this kind of activity, since there is a possibility of fraud present in this sort of activity. This would allow for a pool of investors that would constitute a larger pool of inventors.
Other models are using securities laws to allow people in states that are approved to directly invest as part of a crowd in clean energy products.
This concept is similar to a subscription model that has been used in the past to raise funds for printing of books in the 17th century. When the statue of liberty committee had run out of funds in 1884, Joseph Pulitzer the newspaper publisher proposed that the American public donate funds to complete the collection of the necessary funds to finance the statue. Using this method over $100,000 was raised in a short period of time.
The British rock group Marillion had their entire tour of the United States funded by fans willing to pitch in via the Internet in order to raise money for the trip. Over $60,000 was raised in this manner.
A form of equity-based crowdfunding was used recently in the film industry by a writer/director who still needed funding for the unfinished first feature Foreign Correspondents. Over $125,000 was raised which enabled him to carry on with the project.
There is some concern that there is a great propensity for fraud by appealing to a public cause without offering any kind of security for the contributions of people. After all, what if the recipient is a scoundrel and makes off with the money? This is one major issue that has caught the eye of US regulators.
There is a company called SellaBand that puts the money in an escrow account for safekeeping as the funds are held until the project is completed. In case the goal for the project is not attained, then all of the funds are returned to the contributors. However some arrangements with other promoters will still allow the recipients to keep all of the funds regardless.
Contributors do have some hope of remuneration of a kind in some of the projects. They can have their names listed in the credits, or they may have an opportunity of participation in the profits of the project.
Since all of the communication and collaboration is done via different websites, the contributors or investors have choices in the determination of which projects they wish to contribute, so there is an eyes wide open principal involved here as well. The ultimate payoff for a lot of the people is to have their favorite artist or project reach fulfillment through equity based crowdfunding.