What is Crowdfunding?

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Your capital is at risk and investments are not covered by the Financial Services Compensation Scheme (FSCS).

Posted on 16 January 2020

What is Crowdfunding?


More and more people are learning about crowdfunding and how it is being used to raise money for businesses, good causes and how it is bringing products and ideas to life.  Did you know that crowdfunding is also being used across many different industries including property?   So, what exactly is crowdfunding?

The Financial Conduct Authority (FCA), the regulatory body in the UK, defines crowdfunding as this:

“Crowdfunding is a way which people, organisations and businesses (including business start-ups) can raise money through online portals (crowdfunding platforms) to finance or re-finance their activities and enterprises.”

In its simplest form, crowdfunding is the ability to raise finance for a business, property project, product invention or social reason from a number of people, each contributing varying amounts towards the cause.  In return individuals receive some form of acknowledgement, reward or investment return.  The crowdfunding platform is the ‘matchmaker’, connecting individuals who have money with those looking to raise funds. 

Although crowdfunding is still relatively new, the concept has been around for centuries. Even the great composer Mozart used it, asking for funds to put on a concert, offering manuscripts and other rewards in return.  Modern crowdfunding has been driven by the growth of the internet, making it easier to reach out to large groups of people, globally.  

The 2008 financial crisis was a real catalyst for the development and growth of investment-based crowdfunding (Peer to peer lending and Equity), as the reduction in global interest rates combined with the constraints on banks meant that businesses were finding it more challenging to raise funds and investors had less opportunities to get reasonable risk-adjusted returns on their money. 
 
The 4 Types of Crowdfunding: 

  • Peer to Peer Lending (also known as loan-based crowdfunding) is where you provide a loan on a fixed-term, fixed-return basis.  Interest is paid either at regular intervals or at the end of the loan term, with the loan being repaid at the end of the term.   The rate of interest offered is often higher than that of traditional savings accounts.  Peer to peer lending is widely used for property and small business lending.  Platforms such as Simple Crowdfunding and Funding Circle offer peer to peer loans.
  • Equity Crowdfunding is where the fundraiser (company raising funds) offers investors a share of the company in return for their investment.  The longer-term value of these shares is determined by the success of the company.   Platforms such as Simple Crowdfunding and Seedrs offer these types of investments.
  • Donation Based Crowdfunding is where people or companies invite the community to donate to a ‘good cause’.  Examples of donation-based crowdfunding include supporting an amputee to buy a wheelchair, a new music hall for a school and a relief fund for a recent disaster.  Doners do not get a return other than knowing they have contributed to a good cause.  This is the most philanthropic of the crowdfunding types.  An example of a donation-based platform is Just Giving
  • Reward Based Crowdfunding is where the fundraiser offers to supply something (a reward) in return for community backing.  A reward can be virtually anything, such as credits in a film, first copies of a published book, gym membership, a cool box and more.  The backer may receive the produced item, receive substantial discounts or simply reserve the right to buy the item earlier than the rest of the market.  Crowdfunding platforms such as Kickstarter specialise in this area.   

In the UK, peer to peer lending and equity crowdfunding is regulated by the FCA.  Before investing through investment-based crowdfunding platforms where you are expecting a return on your money, you should understand the risks.  Risk disclosures should be clearly accessible on all regulated platforms..  

Join the growing online property investing community: Simple Crowdfunding
Watch our explainer video: What is Crowdfunding?

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Simple Crowdfunding is a property crowdfunding platform that offers both peer to peer lending and equity opportunities.  We help property developers deliver more homes in the UK and strive to make property investments accessible to everyone, democratising the property market.   Some of our opportunities are IF ISA (innovative Finance ISA) and pension friendly.

So far, the community has raised over £8.73m in funding for projects, ranging from planning gain opportunities to large London commercial to residential conversions.

Since starting the platform, we have built up vast experience and insight in this constantly evolving marketplace, which we freely share with our community members.  Flexibility, transparency and integrity are key to everything we do.  

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#crowdfunding  #peertopeer  #equity  #rewardscrowdfunding