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An Introduction to Crowdfunding

With the banking industry suffering from a lack of trust in recent years and tight financial controls over lending, a whole new industry has emerged to help individuals, businesses and charities raise money to launch a variety of projects and products. The crowdfunding industry has exploded into the financial mainstream attracting millions of pounds worth of investment.

What is crowdfunding?
Crowdfunding is the process of raising money for a project or business initiative from a large number of people who each invest a small amount of money. Sometimes the investors will expect a return but sometimes they invest simply because they support the project.

How does crowdfunding work?
A crowdfunding platform acts as an intermediary between investors and fund-raisers. There are many different crowdfunding platforms online, some of them serving specific niches. Individuals, organisations or businesses who need to raise money can promote their project on one of the crowdfunding websites and people who are interested in investing in a project can browse these crowdfunding websites to find ventures they wish to support financially.

What sort of projects raise money through crowdfunding?
Anyone from an individual musician to a business start-up or a charity can apply for crowdfunding. Emerging musicians as well as established artistes such as Neil Young have used crowdfunding to raise money to record an album, fund a tour or launch a new project. Individuals or businesses with an innovative product or service they wish to launch can try to get financial backing via crowdfunding. Charitable projects both in the UK and abroad can use crowdfunding to achieve fund-raising targets.

Which are the best-known crowdfunding platforms?
Some of the biggest and best-known crowdfunding platforms in the UK include Crowdcube, Seedrs and Crowdfunder. Crowdcube and Seedrs help business start-ups and expansions whilst Crowdfunder has a wider remit helping individuals, charities and communities raise money as well as businesses. Crowdfunder investors expect rewards rather than financial returns. Kickstarter is a major international crowdfunding platform for the creative industry.

How can I use crowdfunding to raise money for my project?
If you want to raise finance for a project or business your first step should be to look at the UK Crowdfunding Association’s (UKCFA) website for a list of its members. All of the crowdfunding platforms listed have signed up to the UKFCA’s code of practice. Members give a short description of their activities so you can decide which crowdfunding platforms to explore further.

Different crowdfunding platforms deal with fund-raisers in different ways. Some allow you to promote your project or business for free and with no vetting, although they will charge fees or take a cut if you reach your fund-raising target. Others will charge a small fee for the privilege of using their platform. Some platforms will want to vet you thoroughly before allowing you to use them, even to the extent of wanting to see your business plan and financial projections.

How can I invest in a crowdfunding project?
If you’re interested in investing you should also take a look at the list of member platforms on the UKCFA website and limit any investments to projects on these platforms. You need to decide why you want to invest – are you looking for a financial return, do you want to be a philanthropist, do you want to support a project or business close to your heart or do you want to support charitable projects?

Your reason for investing may dictate the sort of projects or businesses you invest in. If you simply want to help people starting out or support projects you have an interest in, you may be willing to invest on a rewards basis. This means you are unlikely to get any financial return for your investment but you may get rewards such as a credit on the finished product, free tickets to an event or a free t-shirt. You may get nothing at all except for the satisfaction of giving financial support to something you believe in.

If you want to invest for profit, you need to look for debt-based or equity crowdfunding projects. Debt-based crowdfunding usually involves lending an amount of money and you benefit from the interest paid on the loan. Equity crowdfunding is riskier as it involves buying shares or becoming part owners in a company. Your financial return depends on dividends or selling the shares at a later date. There are no guarantees of when you will get a return on your investment or how much that will be, but the returns can be higher than those paid from debt-based crowdfunding.

Note that if you invest for benefit you will have no tax relief. But if you raise money for donation, a charity project or such with non financial reward, there will be a deduction of your income taxes.

How do I know my investment is protected?
Only a handful of crowdfunding platforms are regulated by the Financial Conduct Authority, mainly because of the amount of regulation imposed. However, crowdfunding platforms who are members of the UKCFA have to follow a code of practice which helps to protect both the fund-raiser and the investor.

As with any other investment, you have to make sure you are aware of the risks before committing yourself financially. Make sure you find out as much about the project or business you are interested in investing in before making your decision. Some crowdfunding platforms will only accept experienced investors.

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