Crowdfunding is an online, public call-to-action (campaign) to meet the financing needs of the Campaign Owner Business. When the Campaign Owner issues transferable securities in exchange for financing, it is considered investment-based crowdfunding. The company operating the crowdfunding service, i.e., an online platform suitable for publishing and managing campaigns, must have an operational license. This provider (CSP), through its service compliant with the European Crowdfunding Service Providers for Business Regulation (ECSPR), allows the launch of campaigns based on equity, loans, or convertible loans, where verified natural or legal persons can indicate their investment intentions online after becoming informed about the investment conditions (available in the Key Investor Information Sheet, KIIS, and other marketing materials). The Investment commitment on TokePortal becomes valid when the investor transfers the deposit to the Campaign Owner’s Custodian Account, which the Campaign Owner cannot access until the shares or other approved transferable securities are issued. The investor may also indicate their intent to sell or buy the securities through the platform, which the CSP displays on the site, linking the buyer with the seller (secondary trading). The minimum investment ticket can change from campaign to campaign but is usually around €50-130, with the maximum amount determined by the investor’s financial situation. This is unlike other forms of capital raising, making crowdfunding the most democratic form of investment, as it makes the capital market widely accessible and allows businesses to embark on a growth trajectory, with risks tailored and transparent.
If a campaign reaches the minimum capital target based on Declarations of Commitments to invest and deposits, the Campaign Owner, after business model and legal Due Diligence, issues the securities and receives the capital in return. TokePortal then monitors for a minimum of three years to ensure that the Campaign Owner informs investors about the plans promised in the campaign at least quarterly. Failure to provide this information incurs a penalty charge against 1% of the raised capital, remaining in the Custodian Account to cover possible non-compliance. Approximately 150 platforms in Europe have an ECSPR license, listed in the public database of the European Securities and Markets Authority (ESMA). An ECSPR license can be obtained from any member state’s securities regulator.
Types of Crowdfunding:
Apart from investment-based crowdfunding, which requires an ECSPR license, there’s donation-based crowdfunding, often utilized by non-profits for social causes but also for cultural or business ideas and projects. Donation-based campaigns can be launched on platforms like IndieGoGo, TokePortal, Sharity, Jóügyekért, Adjukössze, and Goood.
Other types include product or pre-purchase (reward-based crowdfunding), allowing the financing of a projects in return for a certain reward. The biggest reward-based platform is Kickstarter. This channel allows access to alternative financing, with non-banking finance called alternative capital. Startups, tech companies, and SMEs can access equity financing independent from banks:
– Donation-based crowdfunding for projects in the idea phase
– Reward-based campaigns from prototype to mass production
– Crowdfunding for first customers and orders
– Loan-based campaigns for established, revenue-generating businesses
– Meanwhile, funds can also be raised from business angels and venture capitalists. Crowdfunding is compatible with other financing methods.
History of Crowdfunding:
Crowdfunding has always existed, with people historically seeking funds for ideas in exchange for returns or products. Its scale increased with the advent of the internet in the 2000s, enabling wider dissemination of campaign news. The internet boom also ushered in the era of tech startups with high capital needs, not financed by banks due to lack of collateral. Additionally, the 2009 crisis depleted bank financing options, affecting the entire SME sector, leading to the emergence of platforms like Kickstarter. Recognizing the need to finance small businesses, the U.S. government passed the JOBS Act in 2012 to stimulate employment by facilitating direct capital raising. The JOBS Act allowed crowdfunding businesses to bypass expensive IPO authorizations, limiting the amount of capital raised and the investors based on their financial status. The JOBS Act is a milestone in solving the general and global problem of startups and small businesses accessing capital, allowing them to efficiently raise funds in critical stages of development. The EU followed suit in 2020 with the ECSPR, making online capital raising a licensed activity from 2023, with part of the supervisory tasks taken over by the CSP.
The Economic Significance of Crowdfunding:
- Injecting dormant capital into the economy: The funds come from current expenditures rather than investment withdrawals.
- Making the small business sector more resilient to economic crises: Private investors don’t readily sell their shares even in downturns, creating more crisis-resistant businesses than publicly issued ones.
- Preparing businesses for the stock market: Early-stage access to multiple investors makes accountability and external financing more natural.
- Market building: Low investment thresholds enable mass participation in local business successes.
- Ecosystem building: Participants share knowledge and resources with startups, hoping for mutually beneficial partnerships.
The crowdfunding model democratizes access to the capital and supports business growth and investor education, fostering a more inclusive economic environment.