Crowdfunding is not a new concept, but with the Internet and social media, it has gained traction as a powerful tool.
Crowdfunding denotes the raising of funds in small denominations from many people – not just friends and family, but also strangers from afar – and arguably provides a feasible alternative to conventional financing sources for individuals and small enterprises. It is commonly done through online platforms, which usually provides little opportunity for due caution and diligence, and in that sense carries risks for donors and/or investors.
There are four general forms in which crowdfunding can occur: donating; pre-financing, which involves the pre-purchase of products and services where, in return for their contributions, contributors receive early versions of the finished products (as exemplified by platforms such as Kickstarter.com); peer-to-peer (P2P) social lending, where users lend their funds and earn an interest over the agreed terms within a closed social network (as exemplified by platforms such as Zopa.com); and equity-based investing, where there are expectations for worthy results and some kind of financial return (as exemplified by Growvc.com).
