The pages of the worldwide web abound with testimonies of successful crowd funding, of projects requiring a few hundred dollars to many thousands and even millions of dollars to become commercial reality. Creative artists, charitable organisations, and community groups have all benefited, but grass roots commercial success has been achieved through crowd funding in what was previously a gap at the bottom of the funding ladder. And now it is big business that is starting to explore and benefit from crowd funding as they embrace the fastest growing form of e-commerce on the planet.
Traditionally the domain of those wanting to raise $1,000 to $30,000, the commonly held perception of crowd funding started to change when the inventors of the Tik Tok watch turned to crowd funding to raise $15,000 for commercialisation. With worldwide crowd engagement, they changed conventional thinking when in just 30 days they raised $962,000 from over 13,000 supporters. All of a sudden, crowd funding was transforming from a tool for start-ups to a mechanism for bigger business to partake and fund their aspirations. Further reinforcement of this thinking came when the Evolution Dock became the first campaign to raise over $1mil by crowd funding, and then quickly the video game Double Fine Adventure raised over $3mil. When the Pebble Watch successfully raised over $10mil (the first $1mil coming within the first 24 hours of the campaign), big business started to explore how they could apply crowd funding to their own needs and stakeholder aspirations.
So what actually is Crowd Funding? Wikipedia perhaps describes it most clearly – “Crowd Funding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the internet, to support efforts initiated by other people or organizations.” Or put more simply, crowd funding allows for people to put their projects up onto the internet, and solicit many small pledges for which they might offer rewards or inducements to achieve an overall funding target.
Crowd funding is not a recent invention. Back in 1885, Joseph Pulitzer (the editor of New York World) used his publication to raise funds for the pedestal of the Statue of Liberty which had recently been gifted to his city by the French. Over $100,000 (big money back in those days) was raised from the community, with the average pledge being just $1, to fund the pedestal on which the Statue was placed and proudly sits today. The inducement offered to those who pledged was the inscription of their name in the pedestal.
The most notable modern iteration of crowd funding came about in the late 1990s when British rock band, Merillion, wanted to tour the USA but did not have the finances. They were supported by fans who gave £10, £20, £50 and more to assist the band achieve its dreams. Over £60,000 was raised, and the band conducted a successful tour of the USA. On their return to the UK, they offered the fans who had supported them small rewards aligned to the pledges of support they had made – albums, tour jackets, posters, and the like.
Today, crowd funding is here to stay. Many say it is the next iteration of social media. Until around 2006, you could “like” other people, organisations and their initiatives. Simply click the icon, and you could become a supporter, very emphatically and very publicly. Crowd funding took this to the next level when you could reach into your pocket and like them to a whole new level, which involved your cold hard cash. And it was the perfect storm where micro-finance met the internet in the post GFC environment that saw crowd funding really take hold. All of a sudden, people could transfer money quickly and cheaply, and spread the word through social media, at a time when the requirement for cash was at its highest in history.
With the continued successes in the pledge model of crowd funding growing exponentially for around 10 years, much of the world started to consider the application of crowd funding in the investment space. To date, much of the world had not considered or permitted investment crowd funding, opting to protect mum and dad investors from losing their money in potentially bad crowd funding offerings. As a result, equity and financial returns were not permitted to be offered by crowd funding campaigns in many of the countries that allowed pledge model crowd funding to exist in an unregulated environment.
One notable exception to this was in Australia where, while broad scale equity crowd funding remained impossible due to legislation, small scale crowd funding was permitted. The Australian Small Scale Offerings Board (ASSOB) successfully sought exemptions and concessions under the law to be able to facilitate capital raising using crowd funding, limited to a maximum raise of $5mil from up to 20 investors in any 12 month period. Through this unique combination of exemptions and concessions, the world’s first form of investment crowd funding was born.
In 2013, President Obama signed the JOBS Act, part of which included changes to the legislation which would allow businesses to raise capital through the issue of equity via crowd funding. It was estimated that once the new laws passed into being, that there would be an injection of over USD $300bil into small business and start-ups, none of which would need to come from government coffers. Crowd funding was seen to be the solution which would democratise funding, and shift the need for governments to fund the early stage ecosystem, to the community (or “the crowd”) now funding new business as well as business transformation in the case of big businesses. While the USA was forming and shaping the legislative framework, the UK, regarded by many as the leading nation for investment crowd funding, was making it happen.
While many nations still are to permit investment crowd funding to be conducted as a broad scale vehicle for raising capital, many larger companies are positioning to be able to leverage off crowd funding to raise the capital they require. Pharmaceutical companies are already promoting their intention to crowd fund R&D into new drugs. Similarly, mining and exploration have expressed their intention to use this form of capital raising and share the upside with those willing to take the risk in supporting such speculative projects. Big business recognises crowd funding as a way to fund these high risk ventures without having to approach the risk-averse traditional funding sources, thus opening up the opportunity to undertake a broader range of exploratory business streams.
Big business is able to open up investment in specific parcels, divisions and income streams, and by using crowd funding as the vehicle to do so, further engage with the community in a manner that was previously unavailable to them. By offering the community a “slice of the action”, big business has found in crowd funding a way of bolstering their triple bottom line, and building strong sustainable bonds with local supporters. Without the high levels of compliance and paperwork but with more transparency and involvement, big business is able to utilise equity crowd funding to become faster, more flexible and increasingly fashionable in the eyes of retail investors, who will have the opportunity to speculate and invest using equity crowd funding.