crowd funding and issues related to it
An early precursor form of the crowdfunding model was the Subscription business model which was used in the 17th century to finance book prints. Similar to crowdfunding an additional benefit to donors was offered like the mentioning on the title page.
In 1884, the American Committee for the Statue of Liberty ran out of funds for the Statue’s pedestal. Newspaper publisher Joseph Pulitzer urged the American public to donate money toward the pedestal in his newspaper New York World. Pulitzer raised over $100,000 in six months. Roughly 125,000 people contributed to the cause with most donations being $1 or less.
In 1997, fans underwrote an entire U.S. tour for the British rock group Marillion, raising $60,000 in donations by means of a fan-based Internet campaign. The idea was conceived and managed by fans without any involvement by the band, although Marillion has since used this method with great success as a way to fund the recording and marketing of its albums from 2001 to the present.
The United States based company ArtistShare (2000/2001) is documented as being the first crowdfunding website for music followed later by sites such as Pledgie (2006), Sellaband (2006), IndieGoGo (2008), Kickstarter (2009), RocketHub (2009), Fundly (2009), GoFundMe (2010), Appsplit (2010), Microventures (2010) and Fundageek (2011). 
Electric Eel Shock, a Japanese rock band who has toured the world, became one of the first bands without a previous significant recording deal to fully embrace crowdfunding. In 2004 as an unsigned band they raised £10,000 from 100 fans (the Samurai 100) by offering them guestlist for life. Two years later they became the fastest band to raise a $50,000 budget through SellaBand. They licensed the album internationally including to Universal in their native Japan.
In the film industry, independent writer/director Mark Tapio Kines designed a website for his then-unfinished first feature Foreign Correspondents in 1997. By early 1999, he had raised more than $125,000 over the Internet from at least 25 fans, providing him with the funds to complete his film. Franny Armstrong later created a donation system for her feature film Age of Stupid. Over five years from June 2004 to June 2009 (release date) she raised £1,500,000. In December 2004, French entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc launched a public Internet donation campaign  to fund their short science fiction film, Demain la Veille (Waiting for Yesterday). Within 3 weeks, they managed to raise $50,000, allowing them to shoot their film.
Morton Valence is an early example of a relatively obscure band to independently enter into crowdfunding without using a third party website such as Sellaband.
Crowdfunding's earliest known citation was by Michael Sullivan in fundavlog on August 12, 2006.
 Related definitions
There are questions about the legality of taking money from "investors" without offering any of the security demanded by conventional investment schemes. Sites such as SellaBand have a failsafe. They hold funds in an escrow account. If the nominated target isn't reached, all funds are returned to contributors. While sites such as ArtistShare allow projects to keep all the funds raised.
Investors are given something for their money - so in a legal sense, they have paid for and received something. Rewards range from having your name in the credits, an initial shot at the product itself and in some cases even revenue returns.
Micropatronage is a system in which the public directly supports the work of others by making donations through the Internet. In use as early as 2001, the term was popularized in 2005 by blogger Jason Kottke when he quit his day job as a web designer and spent a year blogging full-time, living off the voluntary donations of his readership. Micropatronage differs from traditional patronage systems by allowing many "patrons" to donate small amounts, rather than a small number of patrons making larger contributions.
 Role of the crowd
The inputs of the individuals in the crowd trigger to crowdfunding process and influence the ultimate value of the offerings or outcomes of the process. Each individual acts as an agent of the offering, selecting and promoting the projects in which they believe. They will sometimes play a donor role oriented towards providing help on social projects. In some cases they will become shareholders and contribute to the development and growth of the offering. Each individual disseminates information about projects they support in their online communities, generating further support (promoters).
Motivation for consumer participation stems from the feeling of being at least partly responsible for the success of others’ initiatives (desire for patronage), striving to be a part of a communal social initiative (desire for social participation), and seeking a payoff from monetary contributions (desire for investment).
An individual who takes part in crowdfunding initiatives tends to reveal several distinct traits: innovative orientation, which stimulates the desire to try new modes of interacting with firms and other consumers; social identification with the content, cause or project selected for funding, which sparks the desire to be a part of the initiative; (monetary) exploitation, which motivates the individual to participate by expecting a payoff.
 Crowdfunding platforms
Further information: Comparison of crowd funding services
There are over 450 crowdfunding platforms. Project creators need to do their own due diligence in order to understand which platform is the best to use depending on the type of project that they want to launch. There are fundamental differences in the services provided by many crowdfunding platforms.
For instance, CrowdCube and Seedrs are both Internet platforms which enable small companies to issue shares over the Internet and receive small investments from registered users in return. While CrowdCube is meant for users to invest small amounts and acquire shares directly in start-up companies, Seedrs on the other hand pools the funds to invest in new businesses, as a nominated agent.
Crowdfunding platforms serve as a “network orchestrators”. They create the necessary organizational systems and conditions for resource integration among other players to take place.
Relational mediators act as an intermediary between supply and demand (i.e. SellaBand, Kickstarter, Uinvest). They substitute a traditional intermediary (traditional record companies, venture capitalist). These platforms link new artists, designers, project initiators with committed supporters who believe in the persons behind the projects strongly enough to provide monetary support.
Social gatekeepers assist people to raise fund by exploiting their social network connections (i.e. Kapipal). They add an intermediary role that was previously absent. These platforms intermediate consumer-to-consumer funding.
Growth engines focus on the strong inclusion of investors (i.e. Trampoline Systems). They disintermediate by eliminating the activity of a service provider previously involved in the network. These platforms that use crowdfunding to seek stakes form a community of high net worth private investors and match them directly with project initiators.
 Crowdfunding applications
Crowdfunding is being experimented with as a funding mechanism for creative work such as blogging and journalism, music, and independent film, for funding a startup company, and even for funding public projects. Community music labels are usually for-profit organizations where "fans assume the traditional financier role of a record label for artists they believe in by funding the recording process".
Since pioneering crowdfunding in the film industry Spanner films have published a useful ‘how to’ guide. Innovative new platforms, such as RocketHub, have emerged that combine traditional funding for creative work with branded crowdsourcing - helping artists and entrepreneurs unite with brands "without the need for a middle man."
Crowd lending from non-banks is gaining momentum globally as banks have increased interest rates or pulled back from lending to consumers and small businesses; however, as of early 2012, the non-bank sector of crowd lending is yet to be considered a threat to the big consumer lending businesses of the largest global banks.
In 2013, a new crowdfunding platform CrowdFundEDU was launched to provide a platform to fundraise for educational purposes, including tuition for college, trade schools, workshops and certifications, as well as traditional K-12 school fundraisers, and even as an alternative way to reduce student loan debt. This site has sparked particular interest for its innovate approach to fighting the student debt crisis in America. 
 Philanthropy and civic projects
A variety of crowdfunding platforms has emerged to allow ordinary web users to support specific philanthropic projects without the need for large amounts of money.
Global Giving allows individuals to browse through a selection of small projects proposed by nonprofit organizations worldwide, donating funds to projects of their choice. Microcredit crowdfunding platforms such as Kiva (organization) and Wokai facilitate crowdfunding of loans managed by microcredit organizations in developing countries.
The US-based nonprofit Zidisha offers a new twist on these themes, applying a direct person-to-person lending model to microcredit lending for low-income small business owners in developing countries. Zidisha borrowers who pass a background check may post microloan applications directly on the Zidisha website, specifying proposed credit terms and interest rates. Individual web users in the US and Europe can lend as little as one US dollar, and Zidisha's crowdfunding platform allows lenders and borrowers to engage in direct dialogue. Repaid principal and interest is returned to the lenders, who may withdraw the cash or use it to fund new loans.
Petridish.org focuses on biological projects, for example research of animal species. In addition, it also has many projects that specifically focus on conservation of endangered species.
Some organizations try to make crowdfunding playful. Raise5 allows individuals to microvolunteer as a way to fundraise small amounts of money, and Charitykick has users microfund "dares".
 Jumpstart Our Business Startups Act
In 2012, the JOBS (Jumpstart Our Business Startups) Act was enacted to remove a ban against public solicitation for private companies raising funds. The JOBS Act allows accredited investors to invest through crowdfunding campaigns.
 Intellectual property exposure
One of the challenges of posting new ideas on crowdfunding sites is there may be little or no intellectual property (IP) protection provided by the sites themselves. Once an idea is posted, it can be copied. As Slava Rubin, founder of IndieGoGo said: “We get asked that all the time, ‘How do you protect me from someone stealing my idea?’ We’re not liable for any of that stuff.” Inventor advocates, such as Simon Brown, founder of the UK-based United Innovation Association, counsel that ideas can be protected on crowdfunding sites through early filing of patent applications, use of copyright and trademark protection as well as a new form of idea protection supported by the World Intellectual Property Organization called Creative Barcode.
 Patent disputes
On September 30, 2011, the crowdfunding site Kickstarter filed a request for declaratory judgment against Fan Funded who owns U.S. patent US 7885887 , "Methods and apparatuses for financing and marketing a creative work". Brian Camelio, founder of ArtistShare, is the inventor on the patent. Kickstarter says it believes it is under threat of a patent infringement lawsuit. Kickstarter has asked that the patent be invalidated, or, at the very least, that the court find that Kickstarter is not liable for infringement.
In February 2012, Fan Funded responded to Kickstarter's complaint notably claiming that patent infringement litigation was never threatened, that "ArtistShare merely approached KickStarter about licensing their platform, including patent rights", and that "rather than responding to ArtistShare's request for a counter-proposal, Kickstarter filed this lawsuit."
 Pros and cons
 Benefits for the creator
Crowdfunding campaigns provide producers with a number of benefits, beyond the strict financial gains. The following are non financial benefits of crowdfunding.
- Profile – a compelling project can raise a producer's profile and provide a boost to their reputation.
- Marketing – project initiators can show there is an audience and market for their project. In the case of an unsuccessful campaign, it provides good market feedback.
- Audience engagement – crowd funding creates a form where project initiators can engage with their audiences. Audience can engage in the production process by following progress through updates from the creators and sharing feedback via comment features on the project's crowdfunding page.
- Feedback – offering pre-release access to content or the opportunity to beta-test content to project backers as a part of the funding incentives provides the project initiators with instant access to good market testing feedback.
Proponents of the crowdfunding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd. If it does achieve "traction" in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth promotion in order to reach the fundraising goal. Another potential positive effect is the propensity of groups to "produce an accurate aggregate prediction" about market outcomes as identified by author James Surowiecki in his book The wisdom of crowds, thereby placing financial backing behind ventures likely to succeed.
Proponents also identify a potential outcome of crowdfunding as an exponential increase in available venture capital. One report claims that If every American family gave one percent of their investable assets to crowdfunding, $300 billion (a 10X increase) would come into venture capital. Proponents also cite that a benefit for companies receiving crowdfunding support is that they retain control of their operations, as voting rights are not conveyed along with ownership when crowdfunding.
 Risks and barriers for the creator
Crowdfunding also comes with a number of potential risks or barriers.
- Reputation – failure to meet campaign goals or to generate interest result in a public failure. Reaching financial goals and successfully gathering substantial public support but being unable to deliver on a project for some reason can severely negatively impact ones reputation.
- IP protection – many Interactive Digital Media developers and content producers are reluctant to publicly announce the details of a project before production due to concerns about idea theft and protecting their IP from plagiarism.
- Donor exhaustion – there is a risk that if the same network of supporters is reached out to multiple times, that network will eventually cease to supply necessary support.
- Public fear of abuse – concern among supporters that without a regulatory framework, the likelihood of a scam of abuse of funds is high. The concern may become a barrier to public engagement.
For crowdfunding of equity stock purchases, there is some research in social psychology that indicates that, like in all investments, people don't always do their due diligence to determine if it's a sound investment before investing, which leads to making investment decisions based on emotion rather than financial logic.
Crowdfunding draws a crowd, investors and other interested observers who follow the progress, or lack of progress, of a project. Sometimes it proves easier to raise the money for a project than to make the project a success. Managing communications with a large number of possibly disappointed investors and supporters can be a substantial, and potentially diverting, task.
 Legal restrictions
||This section may contain original research. (March 2013) |
Another significant disadvantage to crowdfunding is the possibility of getting ensnared in various securities laws, since soliciting investments from the general public is most often illegal unless the opportunity has been filed with an appropriate securities regulatory authority, such as the Securities and Exchange Commission in the U.S., the Ontario Securities Commission in Ontario, Canada, the Autorité des marchés financiers in France and Quebec, Canada, or the Financial Services Authority in the U.K. These regulators can have different ways of determining what is and what is not a security but a general rule one can rely on (at least in the U.S.) is the Howey Test. The Howey Test says that a transaction constitutes an investment contract (therefore a security) if there is (1) an exchange of money (2) with an expectation of profits arising (3) from a common enterprise (4) which depends solely on the efforts of a promoter or third party. Clearly, under this standard, any crowd sourcing arrangement in which people are asked to contribute money in exchange for potential profits based on the work of others would be considered a security. As such, the applicable investment contract would have to be registered with a regulatory agency (such as the S.E.C.) unless it qualified for one of several rule-laden exemptions (e.g., Regulation A or Rule 506 of Regulation D of the Securities Act of 1933, or the California Limited Offering Exemption - Rule 1001 (also known as S.E.C. Rule 1001)). The penalties for a securities violation can vary greatly and depend in large part on the amount of profit obtained by the "promoter," the damage done to the investors, and whether a violation is a first time offense. However, a violation may result in both civil and criminal penalties, a return of any profit made and sometimes a lifetime ban from work in the securities industry. According to Section 5 of the Securities Act, it is illegal to sell any security unless such a sale is accompanied or preceded by a prospectus that meets the requirements of the Securities Act.
Debt based Crowdfunding allows a group of individual (or institutional) lenders to lend funds to individuals or businesses in return for interest payment on top of capital repayments. Also known as Peer to peer lending or Peer to business lending. Borrowers must demonstrate creditworthiness and the capability to repay the debt, making it unsuitable for NINA or startups. Active platforms include: rebuildingsociety.com. 
||This section requires expansion with: equity practices in other countries. (June 2012)|
Equity Based Crowdfunding is a mechanism that enables broad groups of investors to fund startup companies and small businesses in return for equity. Investors give money to a business and receive ownership of a small piece of that business (equity and / or debt). If the business succeeds, then its value goes up – and so does the value of that share of that business. The converse is also true. Coverage of Equity Based Crowdfunding indicates that its potential is greatest with Startup businesses, who are seeking smaller investments to launch and that additional follow-on funding required for rapid growth may come from other sources.
 United States
||This section may need to be rewritten entirely to comply with Wikipedia's quality standards. (February 2013) |
In 2011, Jenny Kassan, Paul Spinrad  and Danae Ringelmann of Indiegogo  met and lobbied on behalf of crowdfunding at the government-business forum on Small Business Capital Formation at the SEC meeting.
In February 2011, Jason Best, Sherwood Neiss, and Zak Cassady-Dorion Principals of Crowdfund Capital Advisors collaborated to form Startup Exemption with the goal to lobby Washington, D.C. to update the U.S. Federal Security Laws and make it legal for entrepreneurs to use crowdfunding to raise a limited amount of early-stage equity-based financing. With the assistance of the Small Business and Entrepreneurship Council (SBEC) they partook in two hearings on Capitol Hill. Their framework was the basis for the Entrepreneur Access to Capital Act introduced by Rep. Patrick McHenry (R-NC) on September 14, 2011. The path to legalize crowdfunding including all responsible parties can be found here.
The JOBS Act was signed into law by President Obama on April 5, 2012. The U.S. Securities and Exchange Commission has been given approximately 270 days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of investors. Some rules have already been proposed by the SEC.
The bill went through a number of amendments and on April 5, 2012 President Barack Obama signed the JOBS Act into law. The legislation mandates that funding portals must register with the SEC as well as an applicable self-regulatory organization to operate.
The JOBS Act places limits on the value of securities issuer may offer and individuals can invest through crowdfunding intermediaries. An issuer may sell up to $1,000,000 of its securities per 12 months, and, depending upon their net worth and income, investors will be permitted to invest up to $100,000 in crowdfunding issues per 12 months. An independent financial statement review by a CPA firm is required for raises $100,000-500,000 and an independent financial statement audit by a CPA firm is required for raises over $500,000.
The SEC is now drafting regulations to implement the equity and debt crowdfunding provisions of the bill. The original deadline for regulations is in January 2013. In parallel to the SEC regulations, the Financial Industry Regulatory Authority (FINRA) is creating additional rules related to member firms engaged in crowdfunding.
 Crowd funding services
The JOBS Act enables equity based crowdfunding when it is conducted by a licensed broker-dealer or via a Funding Portal registered with the SEC. Many Crowdfunding services have launched to fill this role, and the space is evolving rapidly. Early portal Profounder closed before SEC guidelines were released, and equity portal Earlyshares acquired charity portal Helpersunite. Many portals have also consulted the SEC on its guidelines.. The first portal operating in the U.S. and geared towards small businesses was founded in 2010 by Alejandro Cremades and Tanya Prive and is operating under the name of Rock The Post.
 United Kingdom
Abundance Generation was the first regulated crowdfunding platform in the UK to be regulated by the Financial Services Authority (now the Financial Conduct Authority). It was approved in July 2011 and launched to the public in 2012. Abundance Generation provides debt finance to UK based renewable energy developers.
On 6 July 2012, Seedrs Limited launched as the first equity crowdfunding platform to have received regulatory approval anywhere in the world, from the Financial Services Authority (FSA). In August 2012 Richard Branson announced his support in the Telegraph for CrowdFunding, CrowdInvesting and CrowdLending platform BankToTheFuture.com. In February 2013, CrowdCube who launched in 2011, became FSA authorised.
 Sweden and Norway
Crowdfunding portals have also launched in Scandinavia supporting both local language crowdfunding and English language crowdfunding. The donation-based CrowdFunding portal FundedByMe has been active in Sweden and Norway since 2011, and Swedish crowdfunding activity is evolving in parallel to Crowdfunding in the USA with Equity-Based CrowdFunding becoming active in Sweden late in 2012.
An Equity Crowdfunding portal has also been launched in Finland in January 2013 supporting Finnish startups and investors via the portal FundedByMe. The focus is on Equity Crowdfunding  with a local team in Helsinki at Hub Helsinki. The legal issues around ordinary reward based crowdfunding have been under debate in Finland as its legislations around this is different from most countries. However the legislation about Equity Crowdfunding is more similar to rest of Europe, and the legal situation is clear. FundedByMe started with Equity Crowdfunding in Sweden in September 2012 and have now also started in Norway and Finland.
Crowdfunding as a discrete activity is not prohibited in Australia. Sources cite that it has been legal in Australia for 7 years.
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