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CrowdFunding, A Quick Overview (continued) - - CFP

posted Apr 3, 2013, 2:09 PM by Andrew Manzo   [ updated Apr 5, 2013, 4:18 PM by David Khorram ]

Crowdfunding began around 2003 and is a new method to finance projects and business ventures that takes advantage of social networks and viral marketing. With this model, a large number of contributors will pledge small amounts to finance a particular endeavor. Currently, equity crowdfunding for startup companies is illegal in the US while the SEC reviews the JOBS  Act that was proposed on April 5, 2012. For more information on the JOBS Act, click here. In contrast, project crowdfunding is a growing marketplace with an estimated $1.5 billion raised worldwide in 2011 (Crowdfunding Industry Report 2012).

Who uses it?

A wide variety of organizations and individuals including non-profits, corporations, musicians, inventors, and authors utilize crowdfunding to finance new projects. Depending on the crowdfunding platform, project owners may specify rewards for individuals who donate  a certain amount. In addition, they may create videos and supply detailed information to persuade potential backers.

Mostly all crowdfunding platforms require that project owners specify a fundraising campaign goal and duration. Depending on the platform, there may be an “all or none” approach, in which a project must meet its fundraising goal in order for the creator to be entitled to the donations, or no set regulations regarding whether or not project fundraising goals must be met.

There are many different motivations behind pledging donations for proposed projects. Backers may desire the designated reward, given a particular pledging level. They may  be a supporter of the industry in which the project has been proposed. Finally, they might  have strong sentiments for a project that aims to tackle a social need or injustice.

Many project backers view crowdfunding as a pre-order system. For instance, if a game designer proposes a particular game that seems exciting and fun, you may be willing to pledge $30 in return for a copy of the game upon its completion.

What are the Legal implications?

The legal implications surrounding crowdfunding and equity crowdfunding in particular have been the subject of healthy dispute and controversy. Most crowdfunding platforms do not claim intellectual property ownership over the projects that have been proposed by individuals or organizations. Backers of these projects may receive rewards for meeting certain donation levels, but they are not entitled to ownership rights of the finished product. This will change with equity crowdfunding, which will go into effect early 2013.

Platform regulations vary from website to website. Platforms like Kickstarter take no responsibility of refunding donations when a project does not reach its funding goal. The owners of the projects are under a legal obligation to refund the money, which does not always occur. In addition, owners are under a legal obligation to complete the project to the best of their ability if they succeed in meeting their fundraising goal.