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Individual investments can be as small as USD Investors in donation crowdfunding tend to be
15, making it affordable enough for almost driven by personal motivation. They are likely Chapter 1
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anyone to invest. With a large number of investors, to have a connection to the company, brand or
each one incurs little individual risk, making project being financed. In some cases, the reward
it attractive for semi-professional or first-time from donating is just the personal gratification of
investors. Entrepreneurs must submit their contributing to a cause or project. In other cases,
projects to a crowdfunding website, define the the investor may have access to privileges such as
investment target, set the deadline for funding and a discount or free access to a service or product.
list the reward to investors. The amounts raised
by crowdfunding can vary from USD thousands to In equity crowdfunding, investors receive an equity
USD millions. stake in return for the investment. Entrepreneurs
define the amount of equity stake for the target
Start-up companies in various sectors (e.g. real funding, and investors’ corresponding equity
estate, consumer products, technology) typically shares will depend on how much they invest in the
use crowdfunding, but it can also be employed to project. The crowdfunding platform may actually
support investment in broadband infrastructure. recommend investment opportunities considered
Crowdfiber is a crowdfunding platform designed most attractive for that particular investor. This
to raise funds to invest in high-speed broadband service can help investors decide on opportunities
in communities across the United States. It allows that have already gone through a filtering process.
communities to advertise their campaigns and
collect funding, and a more advanced version is In debt crowdfunding, the investor lends funds to a
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available to service providers . company and expects this amount to be returned,
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plus interest, by a fixed date. "Mini bonds" are a
According to an industry survey report from type of debt crowdfunding approach that recently
Massolution, crowdfunding was expected to has been made available to potential investors.
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reach USD 34.4 billion globally in 2015, jumping Typically, more established companies use debt
from USD 16.2 billion in 2014. Of the amount funding, although examples of such financing are
raised in 2014, 59 per cent was in North America, still rare. It is possible that as debt crowdfunding
21 per cent was in Asia and 20 per cent was in matures, companies will use it to develop Internet-
Europe. based services and applications.

The risks associated with crowdfunding will vary Case study: Star Citizen, USA
by the type of platform, the company or project
receiving the funds, along with the amount This case study shows how donation crowdfunding
invested. Crowdfunding can be categorized into can successfully attract investment through
three types: donation, equity and debt.
crowdfunding platforms as well as through a
company website. Start Citizen is a video game
• Donation crowdfunding carries the risk of that can be played online in a multiplayer
committing funds to a project that may not mode. The game developer (who owned his
materialize.
own company) initially failed to convince
private investors to invest in the video game’s
• Equity crowdfunding investments can face the development. He then turned to crowdfunding,
risk of lack of liquidity, equity dilution or loss of with a goal of raising up to USD 2 million. He
investment if the company defaults. hoped that this stake would then demonstrate to
private investors that there was demand for the
• Debt crowdfunding is subject to risks such as game, convincing them to contribute an additional
loss of investment and interest payments. USD 12 million .
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Financial regulation plays a very important role The developer used the Kickstarter online platform
in making crowdfunding accessible. In the United and his own company’s website. The benefit of
States, the Securities and Exchange Commission using the website was an ability to avoid paying
(SEC) announced in March 2015 that it will be fees to crowdfunding platforms. Kickstarter, for
possible for non-accredited investors to invest example, will charge 5 per cent of total funds
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using equity crowdfunding. raised plus payment processing fees.

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