Crowdfunding: An alternative source of funding with potential
2 | March 18, 2013 Banking & Technology Snapshot
An alternative source of funding
In the past decade the number of employees and thenumber of self-employed persons have risen sharply (Chart1). According to a recent DIW report the positive trend inself-employment is solely due to those operating as one-person companies (solo self-employment).
Becomingone's own boss of course brings with it considerable risks.
In the early stage, above all, the self-employed requirestart-up capital to make investments.Besides traditional sources of funding, such as loans,venture capital (VC) or grants, crowdfunding platforms arealso increasingly offering an alternative or a complement-ary type of funding in smaller volumes for start-ups, free-lancers and creative persons (e.g. artists, authors,musicians, journalists, designers etc.) or private borrowers.For start-ups the platforms are an ideal way, for example,to prepare for their market entry via microinvestments,enabling the young author to finance his first book and thefilmmaker to complete her first film
all funded voluntarilyby
. The project categories for which monies arecollected range from films, music and gaming to design, journalism and fashion right through to web-basedtechnologies or new products for the retail sector.Basically everyone can appeal for funding for their projectusing a (public) internet campaign. The start-up financingvia crowdfunding is based on the principle of trust, becausethe financing occurs in the early phase and the actualproject does not get implemented until a later stage.
Storytelling paves the way to success
The rules of crowdfunding are relatively simple and thussatisfy exactly the currently very widespread desire for
“convenience” among the tech savvy. First of all, initiators
present their project or ideas, for example in the form of avideo, supplemented with written comments. The projectneeds to inspire as broad a group of people as possible by
triggering collective “fundraising” via network effects. Then
there is the definition of the fundraising target, i.e. howmuch money is meant to be raised for the project. Inaddition, there is the setting of a cut-off date, i.e. the dateby when the fundraising should have been completed.Linking with social networks, online forums, blogs andbulletin boards enables the viral
and above allinexpensive
marketing of the project. If the fundraisingtarget is not met within the allotted time, it is usually the
Brenke, K. (2013). Allein tätige Selbständige: starkesBeschäftigungswachstum, oft nur geringe Einkommen. DIWWochenbericht 7/2013. Berlin.
Besides the necessary income that has to be earned to meet theeveryday costs of living, financial provision also has to be made for retirement.
Begner, J. (2012). Crowdfunding im Licht des Aufsichtsrechts.Mitteilungen der Bundesanstalt für Finanzdienstleistungsaufsicht.BaFinJournal 09/12. Bonn.
According to Section 2(3) of the Capital Investment Act(Vermögensanlagengesetz
VermAnlG), offers worth up tocertain de minimis limits are exempt from the requirement to issuea prospectus. The law assumes that the investor does not requirespecial protection if the issuance volume does not exceed EUR100,000 in twelve months. With financing viacrowdfunding platforms the volume limit of EUR 100,000 is usually notexceeded, i.e. a sales prospectus does not have to be produced.This provision is also to be found in the Securities Prospectus Act(WpPG) in keeping with the EU Prospectus Directive.
Other exemptions in accordance with the VermAnlG, such as thelimitation to a maximum of 20 shares or a minimum price of EUR200,000 per share, do not apply to crowdfunding either, becausethe crowd consists of numerous investors whose stakes tend tobe quite small amounts.The requirement to issue a prospectus does apply, however, tothe still relatively unknown type of funding calledcrowdinvesting.The funding volumes in crowdinvesting are mostly above the deminimis limit of EUR 100,000. This means that the prospectusrequirement applies to the initiator (not to the platform, becausethese are legally separate persons). In addition, the prospectushas to be approved by the Federal Financial Supervisory Authority (BaFin). In contrast to crowdfunding the money investedin crowdinvesting projects is meant to also provide the investor with a monetary share of potential profits made. The investorsreceive for their capital for example shares in the company or asilent partnership without voting rights. Crowdinvesting thusentails far more risks for investors than crowdfunding, becausethey can also lose the capital they have invested.
3,0003,3003,6003,9004,2004,5004,80035,00036,00037,00038,00039,00040,00041,00042,00091 95 99 03 07 11Total employment (left) Self-employment (right)
Employment and self-employment in Germany