What are the different types of crowdfunding?
Are you curious about crowdfunding? To start, you should know that there are four different types of crowdfunding available. While crowdfunding has only been around since 1997, it has rapidly grown and expanded over the years, as have the various forms of crowdfunding.
Since the four types commonly get grouped together, it’s important to understand the differences between each type of crowdfunding. By understanding the differences, you’ll be able to better choose which is right for your goals.
Depending on the goals you’ve set for yourself, will determine which form of crowdfunding is right for you. There are four distinct crowdfunding categories, which are:
- Donation Based Crowdfunding
- Rewards Based Crowdfunding
- Equity Crowdfunding
- Debt Crowdfunding
Now, let’s take a look at each of these types in greater detail to gain a better understanding of them.
1. Donation Based
When it comes to donation crowdfunding, donors give contributions usually a good cause, such as a nonprofit or charity. Generally, these donations will range from $1 to $1,000.
In donation based crowdfunding, donors typically do not receive a reward. Instead the reward is warm feelings of helping others and maybe a tax write-off. Most often, this form of crowdfunding is used for social justice causes, political campaigns or nonprofits to raise money for their next community project. Additionally, individuals may use donation based crowdfunding to raise funds for medical bills, treatments or other personal matters that become too costly to bear alone.
Some of the most popular donation based crowdfunding platforms include, GoFundMe, KickStarter and Indiegogo. While you must always remain within the platforms guidelines, these platforms aid organizations and individuals in raising the necessary funds for their next project.
Donation Based Example:
For example, a local nonprofit is planning a community project to build a new park in the area, but they’re lacking the necessary funds. Therefore, the nonprofit turns to the community to ask for assistance in reaching their goals. By doing so, the nonprofit begins to receive donations from the community to complete their project. Within no time at all, they have reached their goals and are able to start building the park.
2. Rewards Based
For a rewards based crowdfunding campaign, investors that give to the campaign will receive a reward in return for their contribution. Again, the amounts given in these type of campaigns is usually between $1 and $1,000. Furthermore, the reward given is usually the product being funded, such as a new tech gadget, game or really any item.
In this form, companies turn to the crowd to kick off their next project or venture by allowing contributors to test the product or receive a free one upon fulfillment of their crowdfunding campaign.
Most commonly, you will find reward based crowdfunding campaigns on the same platforms you would find donation based crowdfunding campaigns. However, there are a number of other platforms to participate in these types of campaigns as well.
Rewards Based Example:
For example, if a company came up with a new product idea, but was unsure of how the public would react to the product, they could start a rewards based crowdfunding campaign to test the waters. At this point, the company would launch their crowdfunding campaign and offer the product to all those that contributed funds. The product would be the reward received by contributors for helping them get their product off the ground.
Now, this is when crowdfunding begins to look a little different. In debt crowdfunding, investors give money in hopes of receive their principal plus interest back. Oftentimes, you may here debt crowdfunding be referred to as “loan funding” or “lending crowdfunding.”
Unlike most types of crowdfunding, debt crowdfunding does not give investors a reward or equity stakes within the company. Instead, investors make a loan with expectations of receiving a return on their investment.
The way this works is instead of going to the bank for a loan, one borrows smaller amounts from a larger number of people to raise the funds they need. Thus, removing the middleman. Then, the company or individual that borrowed the money pays investors pack over a period of time with interest.
Some common uses of debt crowdfunding can be seen in mini-bonds or peer-to-peer lending.
Most commonly, it will be a company seeking funds for their next venture when it comes to debt crowdfunding. An example of this could be a startup company looking to launch their next product in a big way. Since the startup is likely operating on a shoestring budget, they turn to the crowd for funding. At this point, the company doesn’t have funds to pay back investors immediately, so the company offers investors interest on their initial investment. Therefore, if an investor invested $5,000, they would receive their $5,000 plus interest in the timeframe set by the startup.
Within an equity crowdfunding campaign, investors are contributing much larger amounts of money for equity stakes in the company. Usually, the amounts donated start at about $1,000 and can go up to hundreds of thousands.
Since equity crowdfunding typically involves larger contributions, this type of crowdfunding is most often used to raise funds for the launch or growth of a company. Once an individual has invested, they can expect to receive equity stakes within the company. Please note that the specifics of the equity stakes will vary for each crowdfunding campaign.
In addition to this, equity crowdfunding has more legal guidelines that must be followed. However, in 2008, the SEC passed the JOBS Act, which has allowed many equity based platforms to operate more freely. Due to the complexity of equity crowdfunding, it can be broken up into three different types, which include:
Equity I Crowdfunding
In 1996, the SEC issued a No-Action Letter, which allows accredited investors to browse private investment opportunities on password protected websites. This form of equity crowdfunding relies heavily on Rule 506 of Regulation D, which gives businesses the ability to raise an unlimited amount of capital from as many accredited investors as they’d like.
Equity II Crowdfunding
With the passing of Title II of the JOBS Act and Rule 506(c), companies gained the ability to publicly advertise their funding needs. While investors still must be accredited to participate in this form of crowdfunding, the companies benefit greatly in being able to put their next venture in front of a much larger crowd.
Equity III Crowdfunding
As the JOBS Act continued to roll out new regulations, probably the most promising one is Title III of the JOBS Act. With the passing of this and Regulation A+, unaccredited investors gained the ability to be involved with these crowdfunding campaigns. However, the company seeking funds must deal with a larger amount of audits and compliance regulations.
With so many equity crowdfunding options available, there are a number of platforms to participate in these types of campaigns, as well as a number of investment options.
Equity Crowdfunding Example
A great example of this is a startup company looking to launch their company. Let’s say the company is a new tech startup looking to exceed expectations in the tech world. Once the startup has finalized a business plan, they would turn to the crowd to fund their business startup. Within this crowdfunding campaign, investors are offered a 5% equity stake within the company for the first five years. Therefore, once the startup reaches its funding goals and has launched, investors will begin to receive shares or dividends over the next five years based on the company’s performance.
Bringing It All Together
Now that you have a good understanding of the different types of crowdfunding, how will you use crowdfunding? With so many choices, the options truly are endless! From doing a good deed with donation based crowdfunding to earning higher returns with an equity crowdfunding campaign, donors and investors alike have the world at their fingertips.
However, if you’re seeking to earn a return on your investment, our platform provides the best of both debt and equity crowdfunding investment opportunities. With exclusive real estate deals available at low entry fees, investors can reap the benefits of lowered risks and higher returns.
Are you ready to put crowdfunding to the test?
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