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Banks, Lenders & Investors Finance General

Donation crowdfunding can be useful to businesses

Donation crowdfunding, also called reward crowdfunding, is the third type of crowdfunding covered in my series. It is like Equity and Debt crowdfunding in that it is a way of raising money in small amounts from multiple contributors, but unlike the other two types, it doesn’t appear on the balance sheet.
The “investment” by donors does not generate a monetary return; instead they provide funds for a variety of reasons which mainly relate to receiving benefits or rewards, or simply the “feel good factor” of contributing to a worthy cause
The benefits or rewards can be products or services that arise from the project such as gifts, discount vouchers, event tickets or early release software or products. The other main reason is where the cause is a worthy one such that the donation is more of a charitable nature..
Unlike other forms of crowdfunding, donation crowdfunding is not regulated by the Financial Conduct Authority (FCA).
Clearly it is becoming popular with charities and those supporting social causes, but it can also be a useful way for early stage businesses to raise finance for prototypes or test the viability of ideas and products.
A good example was an online game development company that raised £1,578,316 from 25,681 backers. The fundraising involved raising finance for Elite: Dangerous, a space game where the fundraising campaign benefited from a huge, captive fan base who pledged amounts from £5 to £5,000 plus with five backers pledging the top level of support for a number of levels of in-game bonuses such as credit, rank and cargo, enticing those that wanted to compete in the online universe to get a head start.
We also know of one young product designer who has developed and tested a set of portable, lightweight and easily-storable injection-moulded plastic cutlery for use in the office or outdoors, and is currently using donation crowdfunding to cover manufacturing costs. Donors will get special limited edition colour sets that will be packaged and tailored to the level of the donation. The target is £10,000 and in 10 days since launch in early August 2015, just over £4,200 had been raised.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

An overview of crowdfunding

Funding for businesses and in particular those wanting to invest in development and growth has become extremely difficult to find. Banks have become risk averse and need evermore capital-liquidity provisions which has combined to make it uneconomic to lend to SMEs and those who can’t provide asset backed security.
This has led to the popularity of raising money using online via crowdfunding platforms.
Crowdfunding can be defined as the act of raising money via a website from a relatively large number of small investors.
This is a fairly new form of financing and the last two years has seen some clarity emerging as to the different types and what each involves.
In our next few blogs we will be looking at each type of crowdfunding. This first article is a short overview.
There are three main types of crowdfunding. They are Equity, Debt (aka peer to business or market place lending) and Donation (aka Reward) crowdfunding.
In the first, individuals provide capital for shares in the business looking for funding and expect to receive dividends and/or a profit from a future sale of the shares. They are typically used by start-ups, early stage & growth businesses.
In the second type, Debt crowdfunding, businesses are looking to borrow money as repayment loans, convertible loans or loans with warrant. Lenders are typically repaid at regular intervals with interest on terms that are often more competitive than can be achieved from a bank.
Donation crowdfunding is generally used to raise non-returnable money for a worthy cause, so there is a social component and the “reward” is generally in the form of recognition for investors’ contribution rather than any financial return.
There has been some concern that small investors in such schemes may be inexperienced in investment and its risks and this has led to the introduction of regulation via the Financial Conduct Authority (FCA) in an effort to protect them.
Since April 2015 any organisation offering Equity or Debt crowdfunding facilities must apply to the FCA for permission to operate and must supply supporting evidence including a detailed business plan, evidence of capital reserves, a website showing information that details not only the benefits but also the risks involved.
The FCA is responsible for regulating loan-based and investment-based crowdfunding such that only regulated firms should be used to raise finance. The main restriction relates to the marketing promotion to investors in Equity and requires each investor to acknowledge they are either a high net worth or sophisticated investor or to confirm that they will invest less than 10% of their assets in crowdfunding. This means that firms raising Equity should take advice before doing any self promotion of Equity crowdfunding.
The FCA does not regulate Donation crowdfunding.
For other sources of business finance you can download a free Finance Guide from our website using this link.