Crowdfunding. Advantages and Pitfalls

Creating a crowdfunding platform is becoming an increasingly fashionable way to obtain funding not only for individual projects and startups, but also for existing businesses.

In this article, we will analyze the types of crowdfunding available and some regulatory issues that companies should consider when opening a crowdfunding platform and when searching for financing on crowdfunding platforms.

 An Alternative Way to Raise Funds

If we are talking about crowdfunders, these are people who plan to raise money, attracting small amounts from a large number of people. This is the main principle of crowdfunding, which flows from its very name. Thanks to the Internet today, even very small and start-up companies can reach a wide audience to search for potential investments.

After successful incarnations in the field of non-profit cultural and social projects, crowdfunding is gaining its strength in the field of financing startups and local businesses. Social media plays an important role in the development and promotion of crowdfunding. Social media are important tools for exchanging information about crowdfunding projects and contribute to the transformation of social capital into financial capital. Social networks allow you to create content, distribute it and, of course, discuss it, thereby bypassing the chain of familiar intermediaries.

The diminishing role of intermediaries is also characteristic of crowdfunding as a whole. After all, now you can get financing without the participation of banks or venture capitalists. The process has become much simpler, more transparent and more democratic. I must say that traditional intermediaries treat Crowdfunding with some caution, because they see it as a potential threat. However, crowdfunding is also a useful tool for them. After all, with its help they can track innovative ideas and use the "wisdom of the crowd" to assess the potential success of a project with the goal of creating its clone or investing in it in traditional ways.

Multiple Faces of Crowdfunding

Currently, there is a plethora of crowdfunding online platforms, and this number is growing every year. The platforms are designed to give crowdfunders and investors the opportunity to meet and create a ground for their cooperation. As a rule, such sites simultaneously host a large number of business advertising campaigns. For investors, this is a great opportunity to choose which industries to invest in.

If you intend to register a crowdfunding platform, then you should know that crowdfunding can take various forms. The most common of these are:

•   Donation. This is, first of all, a plus to the investor’s karma, his good mood or a symbolic gift in exchange for their contributions;
•  Remuneration. Small business owners, in exchange for small contributions from investors, promise them compensation in the form of their products or services, usually on a one-time basis;
• Loan. Investors give money to the company at an interest rate, then the amount must be returned;
• Share capital. Investments in exchange for receiving shares of the company with the aim of further receiving dividends.

The first step to implementing a crowdfunding campaign is to choose a platform and identify investors that you can contact through the selected platform. It is important to take into account the legal restrictions for each specific platform. Professionals from IQ Decision UK will advise and select a crowdfunding platform for your purposes.

Possible Risks and How to Avoid Them

The risks of raising funds through crowdfunding cannot be denied, so you should be aware of the facts at an early stage.

• Before starting a crowdfunding campaign, it is recommended that all business be put in order, and all regulatory requirements be considered. This issue is especially relevant for debt and equity crowdfunding.
• The platform should be open and informative, not misleading potential investors. For non-compliance, sanctions will follow.
• When creating crowdfunding campaigns, it must be taken into account that a small number of interested parties can increase significantly, and administrative costs will increase along with them, not to mention the requirements of potential investors who intend to receive financial returns.

Regulatory aspects

Investment crowdfunding platforms must be authorized by the FCA. It is imperative that the platforms meet all regulatory and legal requirements. Please note that current legislation requires appropriate risk disclosure to potential investors.

When discussing crowdfunding based on loans and stocks, it may be regulated in accordance with the FSMA. Therefore, if you plan to register crowdfunding in England, it must be borne in mind that conducting regulated activities in the UK without appropriate permission is illegal and criminally punishable.

 Regulators intend to constantly monitor the crowdfunding activities because of the high risks associated with this type of investment, since business failures are by no means uncommon.