NCFAs innovation and funding ecosystem

Crowdfunding: How It Works and Its Development in 2019

Guest Post | March 30, 2019

crowdfunding article - Crowdfunding: How It Works and Its Development in 2019In the era of globalization and new technology, crowdfunding is becoming an essential tool for fundraising for both charitable and commercial goals.

Main Features of Crowdfunding in 2019

Crowdfunding presents a legal and working model for funds raising. Its success has been proven and reflected in practice. The thing is that very few entrepreneurs have the means to finance their projects at the start. A businessperson may have a profitable idea, but they cannot implement it due to the lack of money. Also, other kinds of expensive projects, such as raising funds for urgent treatment when it is a matter of life or death, can also require such a model. Using crowdfunding, everyone has an opportunity to tell people about their goals, the ways to achieve them, and the required budget.

According to the World Bank report, it is expected that this industry will attract more than $95 billion this year. Through that, the need to finance a promising project and solve a specific problem can be addressed to a broader public. The main advantage here is that everyone can get what they want — a recipient can raise money for their business, and a sponsor can donate the allowable amount to the project upon their will and then use the resultant product or service.

Despite the presence of a direct connection between the one who needs money and those who provide it, crowdfunding usually requires a page on social networks or a website dedicated to the project through which funds are being withdrawn. Also, if you need to write about this topic, you can consider specialized online resources to buy essay papers online.

What Is Crowdfunding?

As we can judge by two words composing this concept, crowdfunding is a method of raising funds to finance a specific project by anyone who wants to do it. With the help of this approach, money can be collected for multi-purpose charity, volunteer projects, political campaigns, social investments, seed capital for business, startups, etc.

To varying degrees, each of us used to participate in such ventures. For instance, you might have taken part in collecting money for a gift to a friend, sprucing up the territory near your place of residence, and so on. These are examples of one-time projects. At the same time, many major crowdfunding platforms are persistent. They are designed to streamline the process of collecting donations because, in this way, a specific idea can be presented to many people interested.

Crowdfunding Models

Donation

The first one is the donation model. It is suitable for raising funds for carrying out socially significant projects. For example, it can be constructing or repairing works of orphanages or retirement homes, provision of medicine and financing the treatment of socially disadvantaged people, and so on. This model provides no compensation — contributors are only thanked for the funds given.

Rewards and Pre-sales

The second option is a reward-based mode providing a non-monetary form of compensation. It may be a printed copy of a literary or scientific work, a CD with a movie or documentary film after releases, a ticket to a theater performance or a show, which was financed by the funds raised.  It is based on pre-sales when the collected funds are used to produce a specific product. Before it gets on the market, it is distributed among all those people who were involved in its financing. The amount of financial support determines the sale price. In some cases, a particular discount is also applied, which serves as an additional incentive.

Crowdlending

The fourth form is related to the provision of funds for getting interests or crowdlending fees. Despite many differences, this model is similar to a bank loan.

Crowd-investing

The fifth type is a crowd-investing model, based on participating or getting income formed after the implementation of the funded project or selling a company’s property.

What Projects Are Relevant for Crowdfunding in 2019?

Today, crowdfunding has radically evolved from the practice of attracting limited contributions mainly for charitable purposes to a large industry offering major sponsors and investors to get access to new profit opportunities. Hence, the fourth and fifth models of crowdfunding will be mostly used this year.

crypto and blockchain - Crowdfunding: How It Works and Its Development in 2019

Legal Regulation of Crowdfunding Platforms

Many web-based crowdfunding companies have been registered in exotic countries to avoid paying taxes. Today, the time for non-regulated platforms is gone. Contemporary crowdfunding services for collecting charity donations have a few limitations — only bans on fraud and false advertising are applied to them.

See:  Finally. Canadian Securities Administrators Announce Intent to Harmonize & Improve Crowdfunding Exemption

However, services based on investment compensations must be regulated by the relevant authorities of the countries in which they operate. For their transactions, customers will unlikely use platforms that are not regulated at all. 2019 will be the year when most platforms will become compatible with a large number of crowdfunding options that exist today. In this way, the European Union has already established rules of general access that help crowdfunding resources overcome the obstacles they face in their activity and provide more opportunities for international investors.

Funds Protection Using Smart Contracts

With a significant number of scams in 2018, like the iBackPack project that collected nearly $800,000 via both Indiegogo and Kickstarter platforms, the adoption of additional security means is vital.

Indeed, people who do not have sufficient knowledge of how this market works risk losing their investments. The studies of many crowdfunding projects have shown the need for using an escrow mechanism for the funds to be released. Also, the use of smart contracts can make funds even more secured. In this case, the profit is distributed automatically among teams of investors upon the project termination.

The implementation of such proven technologies as blockchain, artificial intelligence, and robo-consulting in crowdfunding should provide additional protection for financial resources along with maximum investment efficiency.

Cryptocurrencies and Blockchain

This year, we must consider more cryptocurrency projects in crowdfunding. Given the interest of people to virtual currencies over the past few years, crowdfunding has reached new horizons.

Despite some slowdown in ICO growth, token transactions, i.e., shares of crypto projects in the secondary market will provide new opportunities for modern crowdfunding. The launch of Security Token Offerings (STOs) is going to be the next step in the development of open-source technology.

See:  FCA reveals findings from first cryptoassets consumer research

Also, crowdfunding platforms usually charge significant fees. The use of blockchain technology can significantly reduce these payments and make the funding process more transparent.

Investments in Startups

Today, more than 70% of the world's population is considered as potential investors. People are actively seeking investment options, although they have limited resources. Online platforms such as Roobee provide new microfinancing ventures starting at $10, which enables people to participate in Initial Public Offers (IPO), real estate projects, different investment programs, and many startups.

Taking part in the joint financing of startups became more comfortable thanks to equity crowdfunding. While wealthy investors are hesitating to consider small and medium projects in the early stages of their development, a significant number of ordinary individuals can provide substantive support to any startup project.

So, despite the possible risks, crowdfunding presents one of the most promising types of funds raising for both technological and social ventures. This method has already helped millions of innovators present their ideas to the general public. Without a doubt, crowdfunding will continue to thrive in this and the following years.

Source:  Guest post

 


NCFA Jan 2018 resize - Crowdfunding: How It Works and Its Development in 2019 The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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