Finance Types

Crowdfunding

Crowdfunding

Crowdfunding means raising money from other people – a ‘crowd’ – for a product, service, project, idea, campaign or cause. Several forms exist including rewards-based and investment-based crowdfunding.

Seed or ‘rewards’ crowdfunding is used to fund the creation, launch or development of new products and services. Backers (the crowd) pay upfront for a product, service or project. Popular platforms include Kickstarter, Patreon and Indiegogo.

Many creative businesses have used ‘rewards’ crowdfunding as a way to be paid in advance for products such as books, board games, albums and films. It has been used by businesses across multiple sectors and offering a wide variety of physical products too. Some businesses use it to test or validate demand. Some well-established businesses use it to gain access to new markets and audiences.

Many creative businesses have used ‘rewards’ crowdfunding as a way to be paid in advance for products such as books, board games, albums and films. It has been used by businesses across multiple sectors and offering a wide variety of physical products too. Some businesses use it to test or validate demand. Some well-established businesses use it to gain access to new markets and audiences.

Equity crowdfunding platforms offer equity stakes in early-stage or growth companies in exchange for funding. Crowdcube and Seedrs are well-known UK platforms. Another, Ethex, aims to connect businesses with environmental and social objectives with backers, raising finance through community shares (see below) and bonds.

Analysis by PwC and The Crowdfunding Centre of more than 465,000 rewards crowdfunding campaigns over a two-year period found around one in five hit their targets, though this varies by sector.

Debt crowdfunding is sometimes also known as peer-to-peer lending. It involves individuals lending money directly to unrelated people and businesses without using a bank or financial institution as an intermediary, via specialist websites.

Donation crowdfunding is typically used by charities (and sometimes social enterprises) to fund or raise money for community projects and initiatives.

Community share offers are a specific form of fundraising, uniquely available to co-operative and community benefit societies offering withdrawable, non-transferable share capital. Community shares have been invested into over 500 co-operative and community businesses including shops, pubs, renewable energy schemes and housing projects.

Equity and debt crowdfunding is regulated in the UK by the Financial Conduct Authority (FCA). Co-operatives and community benefit societies are regulated by the Financial Conduct Authority, but the the FCA does not approve or regulate community share offers that are exempt from the Financial Promotions Regulations.