Crowdfunding – A Modern Way Of Funding

Crowdfunding – A Modern Way of Funding

Discuss about the Crowdfunding- A Modern Way of Funding.

Crowdfunding is a modern method for small businesses to collect funding for their ideas through the public. Usually, corporations collect funding through investment firms such as banking corporations, investment firms, and venture capitalists, but these firms did not invest in small businesses. Crowdfunding enables small businesses or entrepreneurs to directly collect investment from people who are interested in their ideas. The investment provided by the public to a small business helps them start their operations and provide the profits back to investors. To promote crowdfunding in Australia, the government has passed a new act which provides a new structure for generating investment through crowdfunding. This essay analyses the benefit or drawback of crowdfunding method of investment, to give advice to Howard Jones regarding his new project. The essay will evaluate crowdfunding from the perspective of companies who use it to generate their capital. Further, the essay will compare legislation of Australia with other countries.

In modern times, a large number of people have access to technology; this access leads to new innovations daily. In past few years, the number of new entrepreneurs has grown significantly. People are using modern technology to create new products or applications each day, but to take such products to large scale, entrepreneurs require funding[1]. The traditional methods of investment which include, taking loans from banks, investment firms or venture capitalists, are limited in numbers. A large number of the entrepreneurs were not being able to raise capital for their project. Crowdfunding has provided hope to such entrepreneurs by providing them funding from the public. Crowdfunding uses online platforms to connect entrepreneurs and public to assist them in gaining investment. In crowdfunding, the capital is provided by family, friends, small-scale investors and other public who are interested in the idea of the entrepreneur[2].

For entrepreneurs, there are four different crowdfunding methods to generate investment from public, which includes, reward, charity, equity and lending method[3]. In the reward-based method, the investors receive inventive for the capital they invested in the entrepreneur’s project. In charity or social based method, the investment generates for some social purpose which benefits the society. The equity-based method is most popular; financier receives shares of the corporation for the investment provided by them. In the lending based system, the capital is considered as a loan and the company pay it back with interest to the financier[4]. Other than selecting the method of investment, there are few steps which must be followed by entrepreneur while generating funding through crowdfunding process. The first and foremost step is providing true and complete information regarding the project to the financiers. The information contains project details such as funding needed, product specification, time frame, and rewards given to the investors[5].

Crowdfunding Methods for Entrepreneurs

Crowdfunding has been used by several organisations as a method for generating funding for their operations. Indigogo and Kickstarter are two most popular sites of crowdfunding in Australia[6]. These websites along with various others help many entrepreneurs to generate funding for their businesses. Small Australian technology corporations such as Ninja Block and KoalaSafe have been successfully used crowdfunding website Kickstarter to raise funding. Another organisation called Satellite Reign has raised capital for their real-time action video game through Kickstarter. More than 3.3 million people invested their money in twenty-two thousand crowdfunding projects using Kickstarter in 2014. Pozible, a website for crowdfunding projects, has launched more than eight thousand entrepreneur’s projects and generated investment of $25 million[7].

With commercial purpose, crowdfunding is also used by charitable organisations to generate funding for social causes. It is a modern way of donating money to charitable causes[8]. For example, four years old girl named Eliza had Sanfilippo syndrome which is a neurological disorder. Due to symptoms of this disease, Eliza was not able to eat, walk or even talk. Eliza’s treatment requires $2.5 million, but her parents did not have that money. Eliza’s father creates a homemade video of Eliza’s condition and uploaded it over the internet. The mainly raised through such video was not enough for the treatment of Eliza. That video was seen by a filmmaker named Benjamin Von Wong who made a short film over Eliza. The filled was named ‘Saving Eliza’ and along with such film, a crowdfunding page was also established to raise funding for Eliza’s treatment. The camping for saving Eliza has raised more than $1.8 million for her treatment through crowdfunding[9].

Due to its popularity, the Australian government decided to establish regulations regarding crowdfunding procedure in Australia. The government enacted Corporations Amendment (Crowd-sourced Funding) Act 2017[10] to promote and regulate the process of crowdfunding. The act amended various regulations of Corporations Act 2001 and provides new policies for small corporations to raise funding through crowdfunding. Many policies of Australian Securities and Investments Commission Act 2001 have also been altered due to new crowdfunding policies. Many new exemptions have been provided to many market operatives to promote the usage of crowdfunding in Australia. The policies of Australian market license have also been amended to provide various exemptions to the corporation[11].

The crowdfunding act provided that small sector organisation can spend ten thousand dollars on the crowdfunding project in a year. The wholesale investors with annual revenue more than $250,000 and assets value more than $2.5 million are able to invest in crowdfunding projects. The limits provided by crowdfunding act restrict the opportunity for entrepreneurs to generate funding. Many market experts criticised the crowdfunding policies and stated that the limits provided by the law are against the basic nature of crowdfunding principles. Other countries such as the United Kingdom and the United States have also provided legislative policies regarding crowdfunding method but there is no limit provided by them over the funding.

Crowdfunding Examples

In the United States, the Jobs Act 2012 enables corporations to raise funding through online websites for their projects. The Securities and Exchange Commission regulates the policies of crowdfunding and in 2016 it amended the act by introducing equity crowdfunding for the companies[12]. Most of the entrepreneurs in the United States use crowdfunding websites such as Kickstarter to generate investment for unique and original business ideas. The lack of investment limit allows entrepreneurs to generate high investment which assists in the growth of their corporations[13].

There are several organisations that used crowdfunding as a primary method for generating capital for their operations. One of the successful examples is Oculus Rift. Oculus Rift used crowdfunding to generate investment for their virtual reality kit which was significantly successful and it raised more than $2.5 million. The company uses such money to advance their virtual reality technologies and in 2014 they were bought by Facebook for $2 billion[14]. In 2015, more than $34.4 billion was generated by entrepreneurs throughout the world using crowdfunding procedure. Even with all the limitations, Australian entrepreneurs have the option to raise capital through crowdfunding process which can be beneficial for them. The steps taken by Australian government will improve their economy and promote small entrepreneur businesses[15].

The project of Howard Jones regarding increasing the life of batteries can revolutionised the industry. A large number of people will be interested to invest in the project of Howard. Therefore, Howard should choose the method of crowdfunding to raise capital for his project. Howard will be able to generate a large amount of investment through crowdfunding procedure. The regulation provided by the Australian government will provide various exemptions to Howard such as lower corporate social responsibility disclosures[16]. Howard will also have the benefit of controlling the decision for his company because, in case of traditional sources, large corporations who invest in projects prefer to create their own policies. Due to its benefits, crowdfunding is the better option for generating investment for Howard Jones, than compared to traditional sources.

Conclusion

From the above essay, it can be concluded that crowdfunding has gained considerable popularity and in the future, it is going to generate more attention as well. Crowdfunding provides a source of investment to small entrepreneurs who cannot get investment from large corporations. The regulations established by Australian government are criticized by market experts, but they will assist the small corporations of Australian by providing them an investment. As compared to other countries the Australian regulations provide more limits over organisations while investing in the crowdfunding projects. In case of Howard Jones project, crowdfunding is a better option than compared to tradition method due to its benefits. Crowdfunding provides various exemptions and control to Howard than other sources, therefore, Howard should select crowdfunding as a method for generating capital for his project.

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