Crowdfunding (English “crowd funding”, crowd – “crowd”, funding – “financing”) is a way of raising funds for a specific goal or project by asking a large number of people to donate money, usually in small amounts and usually within a relatively a short period of time, such as a few months. Crowdfunding is carried out through online platforms.
Crowdfunding is most commonly used by start-ups or growing businesses as a way to access alternative funds. It is an innovative way to find funding for new projects, businesses or ideas.
Large amounts from one or more sources
Many small sums from a large number of persons
Financial commitments can be made and collected through the crowdfunding platform.
Crowdfunding platforms will provide a secure and easy-to-use service. Many platforms use an all-or-nothing funding model. This means that if you reach your goal, you will get the money, and if not, everyone will get their money back – no hard feelings and no financial loss.
Types of crowdfunding
The company borrows money with the understanding that the money will be returned to depositors with interest. It is very similar to traditional bank borrowing, except for many investors.
Sale of a stake in a business to a number of investors in exchange for investment. The idea is similar to how common stocks are bought or sold on the stock exchange or in venture capital.
People make donations to a project or business with the expectation of receiving a non-financial reward, such as goods or services, at a later stage in exchange for their contribution.
Individuals donate small amounts to achieve the larger goal of funding a particular charitable project without receiving a financial or material return.
Profit sharing/revenue sharing (profit-sharing / revenue-sharing)
Businesses can share future profits or earnings with investors in exchange for funding now.
Crowdfunding of debt securities (debt-securities crowdfunding)
Individuals invest in debt securities issued by a company, such as bonds.
Combining elements of more than one type of crowdfunding by a company.
Forms of crowdfunding
Initial Exchange Offering (IEO) is a form of blockchain crowdfunding in which a crypto exchange provides blockchain startups with a platform to issue tokens and raise funds from investors. Thus, IEOs allow companies to raise capital by selling utility tokens. On the other hand, the development of an IEO provides additional protection for investors, since IEOs are subject to verification by a crypto exchange, which reduces the risk of investing in tokens. The exchange acts as an administrator and evaluates potential sales before they take place. The project compensates the exchange for the role it plays in the sale of its tokens. This is a new crowdfunding method in which a project sells its digital assets through a cryptocurrency exchange.
Security Token Offerings (STO) An offer of a tokenized security is an investment or an investment contract in an underlying investment asset such as stocks, bonds, funds and mutual funds. A security token is a negotiable electronic instrument representing ownership, recorded on a blockchain. STO can also be seen as a hybrid approach between cryptocurrency and token offerings and the more traditional initial public offering (IPO) due to the intersection of both of these fundraising methods.
Initial DEX Offering (IDO) is an initial decentralized offer or in other words, it is a cryptocurrency crowdfunding method using a decentralized exchange (DEX). The DEX initial supply cryptocurrency is what investors will use to trade or pay for utilities within the project once it has launched. Funds raised during the IDO go into the liquidity pool. As soon as the project is launched, the liquidity pool will open for trading. Investors who bought the token earlier can start trading immediately.
IDO is a new way for crypto firms to raise money from investors and a sort of cryptocurrency asset exchange that uses liquidity pools to allow traders to trade tokens such as cryptocurrencies and stablecoins.
Four steps to start your own crowdfunding campaign
Do you have a project that you need funds for? Or are you planning to expand your business? Maybe it’s time to raise capital?
With the specialists of our company, you can easily go through each of the stages, as well as protect your idea from possible theft.
1. Platform choice: How long do different platforms allow campaigns to run? What is the limit on the amount you can raise? Who will see it? Since some platforms may attract different types of supporters.
2. Obtain consent from the platform: at this stage, fill in the online forms and prepare the necessary documentation. The main task of the platforms is to verify the legality of the project and actions. The main document is the prospectus or offer document. It sets out the details of the investment, any prescribed risk warnings, and investor reflection periods.
3. Preparing your presentation: After the platform agrees, you will be able to make your presentation. When working on a presentation, it’s important to pay attention to the idea itself, as well as details such as why you need the funds and how much you hope to raise. If it is a reward based platform, list what the sponsors will receive. For an equity-based platform, you need to specify the amount of equity and the price of the share, if it can be determined.
This is a full-fledged marketing campaign aimed at promoting your project or business and increasing its attractiveness to investors. And this may include frequent updates to keep things interesting. With a crowdfunding campaign, you will need to share your business and financial information with complete strangers. This includes up-to-date company information, financial statements and forecasts, a credible business plan and, if you are already in business, a realistic valuation.
4. End of Campaign: On some social crowdfunding platforms, you receive all donations collected during the campaign. With others, you must set a goal and only get paid if you reach it.
With crowdfunding, you are given a deadline to attract investors. If successful, the platform arranges for the payment of funds to you and issues stock certificates or convertible bonds to investors. If you do not attract investors, you can extend the term.