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Crowdfunding
Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet. One early-stage equity expert described it as “the practice of raising funds from two or more people over the internet towards a common Service, Project, Product, Investment, Cause, and Experience.”The crowdfunding model is fueled by three types of actors: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organization (the “platform”) that brings the parties together to launch the idea.
In 2013, the crowdfunding industry grew to be over $5.1 billion worldwide.
The term “The JOBS Act” is also sometimes used informally to refer to just Titles II and III of the legislation which are the two most important pieces to much of the crowdfunding and startup community. Title II went into effect on September 23, 2013. Title III is still pending.
Types of crowdfunding
There are two primary types of crowdfunding:
1. Reward-Based Crowdfunding: entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares.
Reward-based crowdfunding has been used for a wide range of purposes, including motion picture promotion, free software development, inventions development, scientific research, and civic projects.
2. Equity-Based Crowdfunding: the backer receives unlisted shares of a company, usually in its early stages, in exchange for the money pledged. The company’s success is determined by how successfully it can demonstrate its viability.
Equity-based crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity. In the United States, legislation that is mentioned in the 2012 JOBS Act will allow for a wider pool of small investors with fewer restrictions following the implementation of the act.