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Submitted by Doug Hornig of Casey Research,
Back in the 1960s, a clever but financially disadvantaged fellow placed a small ad in a national magazine that read something like: Money needed. Please send $1 to the address below. Do it
today! No specific need was given, and nothing was promised in return, so that fraud could not later be charged.
Yet within a few months, thousands of dollars arrived in his mailbox, a considerable sum in those days. Or so the urban legend goes.
A half-century later, many things have changed, but one thing remains unchanged: People still need money, and they have not ceased to innovate ways in which to get it. We have written extensively in this space about many of the P2P Internet connections that are transforming the planet... in commerce, in education, in the job market, and with business and social networking. The list of possibilities is truly endless. For yet another example, the world of money has been given a Red-Bull jolt by a fast-growing phenomenon known as "crowdfunding." Previously, if you had a grand scheme for a new product or service and you needed seed money to get your project off the ground, you had to save it yourself, borrow from friends and relatives, or go with begging bowl to your local bank, which was unlikely to see you as the next Steve Jobs. If it was a big enough idea, you might even attract the attention of a venture capital (VC) company, but there you had to be prepared to offer many pounds of flesh in return. And still, those ideas that didn't meet with bank criteria (there's no collateral for a software startup) yet weren't large enough for the VC crowd often fell into a no man's land, scraping out some funding from unorganized, so-called "angel" investors, or never getting funded at all. More recently, we've seen the rise of for-profit Internet alternatives to traditional lending, such as Prosper, Zopa, and the market leader, LendingClub. These P2P companies specialize in small loans – LendingClub's limit is $35,000. They don't originate loans – they facilitate them, cutting out the banks and creating a situation that allows individuals with spare cash directly to invest in other people's dreams, while the dreamers can borrow based on the public responses to their particular (hopefully compelling) stories. For each loan, there is a multitude of lenders, not just one. It's a win-win proposition. Borrowers receive below-market rates with less hassle than is usually encountered at a traditional financial institution. Investors get an excellent rate of return, and can attenuate risk by building a portfolio spread across multiple loans. And LendingClub prospers by taking a cut. The site claims a very low default rate of less than 3% since its inception in 2007, and it has been a monster success. To date, LendingClub has negotiated nearly a billion dollars in loans, a meteoric ascent from about $175 million just two years ago. Other, more philanthropically oriented organizations either are or function a little more
Fundable. Not quite so well-heeled? You can still play the game. supporting the local rescue squad. FirstGiving.000. However. and investors the chance to buy as little as a single share of stock. And it can be brought together by a website whose purpose is just that. A new US law (H. GlobalGiving. These are the characteristics that . 2006. pre-IPO shares in privately held companies. Calvert Foundation's Community Impact Investing. usually via the Internet.R. "crowdfunding" is generally defined as an ongoing money-raising effort organized through the Internet. and individuals can buy in with an investment as low as $1. project. Clearly there are a lot of new and imaginative ways of moving money around that vie for our attention. There's also MediaShares. Zidisha.. or whatever. Neighbors pitching in to help someone who's had a house fire. is as old as human groupings. Those that work this way include Kiva. Many of them would be considered crowdfunding (derived from the general term "crowdsourcing. with or without an underwriter. Companies can apply for up to $500. 2010. These opportunities are generally only open to accredited investors.1070) has been passed by Congress that will allow for advertising the sale of stock to the general public and selling to non-accredited investors. primarily in the developing world. if thought of merely as the pooling of resources for a common cause. the very term "crowdfunding" is just six years old.like nonprofits. Sites such as SharesPost and SecondMarket provide access to participation in private placements and the purchase of already existing. to support efforts initiated by other people or organizations. MicroVentures was the first Internet broker/dealer to help startups in the US raise capital in exchange for equity. calling it any "collective effort of individuals who network and pool their resources. Crowdcube. this is expected to greatly expand these types of online offerings. And the first book on the subject – Kevin Lawton and Dan Marom's The Crowdfunding Revolution – wasn't published until October. while a given crowd might pre-exist as a community. or the principal plus a small amount of interest. since the definition of this term still tends to be on the loose side. and the Grameen Foundation. In contemporary usage. sending truckloads of canned goods to disaster areas – all of these cooperative efforts represent crowdfunding of a sort. it can also arise completely spontaneously." which has traditionally referred to works like Wikipedia driven by large numbers of amateur contributors). i. They solicit donations in order to make very small micro-loans to budding entrepreneurs. those who can verify that they are high-net-worth individuals and attest that they're comfortable with assuming a high degree of risk. Donors either simply get their money back. As such. with Word Spy attributing its first official appearance in print to blogger Michael Sullivan on his fundavlog of August 12. SeedUps specializes in tech." Crowdfunding. At the other extreme – if you're an upscale investor looking outside of the traditional markets for greater risk/reward potential – there are alternatives for you as well.000. But that isn't the way it's thought of nowadays. CreateaFund. it is intimately related to and initiated by online communities and social networks. The stock can be sold online. It can be applied very widely. and Symbid also finance business startups. In fact. Grow VC. which offers companies the opportunity to crowdfund IPOs. from disparate groups around the world which happen to share an interest in funding a person. in the form of secondary markets.e. as Wikipedia does. which received tremendous worldwide publicity when its partner organization Grameen Bank shared the Nobel Peace Prize with Muhammad Yunus in 2006. PayPal's MicroPlace.
A British rock group. the company in September 2009 pulled off a gala global premiere. whose breadth is confirmed by a quick look at the projects currently listed: game development. film was a natural.000 from all over the world. traveling dramatic performances. and has even published a guide titled How to Crowdfund Your Film. make a list of "perks" for . formalized the concept. among others. The album." Since then. and was launched at Sundance in 2008. inkubato. and A Swarm of Angels – have set up shop to service the creative arts. and their record company wasn't prepared to pony up the support money. Within three weeks. satellite-linking to more than 700 cinemas and other venues in 63 countries. funded through ArtistShare. One of them. a documentary film. they managed to raise $50. with barriers to entry in the movie business historically so high. set in 2055 and starring Oscar nominee Pete Postlethwaite. American composer Maria Schneider's Concert in the Garden became the first album in history to win a Grammy Award without being available in retail stores. My Show Must Go On. Word went out via the Net. Demain la Veille (Waiting for Yesterday). cutting out the record company entirely. In 2005. Funding the Arts Early crowdfunding efforts often involved musical groups that needed cash to advance their careers. the band raised $60. ArtistShare. AKA Starter. Marillion. and some kind of knitting endeavor (which you can back if you read German). Movie crowdfunding was initiated by French entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc in August 2004. but the band lamented on a newsgroup that they couldn't hack it financially themselves. originally focused on fundraising for independent film. received four nominations that year and copped the Grammy for "best large jazz ensemble album. Later. set up an account with PayPal. As an example of how these things work. Spanner Films has been a centrally organized pioneer in this area. ArtistShare projects have received several other nominations and taken home four additional Grammies. Many. just in case you have any great cinematic ideas. an asthma education app. a graphic novel. a gender-transition calendar. a Canadian comic-book anthology. founded in 2000. Sponsume. With just a live CD promised in return. Other music-centric crowdfunding sites followed ArtistShare's lead. Marillion's fans then took it upon themselves to raise the necessary bucks. Further taking advantage of the Internet. Music and the arts have always been logical targets for crowdfunding and. Indiegogo.000. becoming the first fully crowdfunded website for music.distinguish crowdfunding from traditional co-ops. wanted to tour the US in 1997. Spanner crowdfunded a film called The Age of Stupid. allowing them to make the picture. But the site soon branched out into all sorts of creative projects. here's Indiegogo's model: Entrepreneurs create a page for their funding campaign. including SellaBand (2006) and PledgeMusic (2009). many other sites – including RocketHub. Marillion went on to tap its Internet fan base to fund the production and distribution of subsequent albums. with a total audience of more than a million people. and the money poured in. when they launched a public Internet donation campaign to fund their film.
Crowdfund Intermediary Regulatory Advocates. Several other sites that will let consumers participate in designing new fashions are currently under development. startup crowdfunding portals and others" to design and implement "their own custom white label crowdfunding & voting platforms. Its statistics are considered one of the most accurate yardsticks by which site popularity can be measured. Local Motors "is a small Phoenix. Personal wants and needs – GoFundMe specializes in fundraising for individuals. It's difficult to overstate how fast and furious crowdfunding has grown (but it pales in comparison to the growth potential of a new technology in replication). the French crowdfunding platform dedicated to technologic startups. Fashion – Milk and Honey Shoes allows customers to design their own shoes. And so on.000 designers. announce the successful completion of their seed round of financing. bringing it to the attention of some major players in the drug-discovery arena.largely through crowdfunding. Arizona-based automotive firm that uses crowd sourcing for brainstorming. Public projects – Want those bike lanes but your town is out of money? You can turn to CivicSponsor. while Petridish invites donors to "fund science & explore the world with renowned researchers. ranks some 30 million websites worldwide. all of which sprang into existence subsequent to the passage of JOBS. DIY – Launcht claims it "empowers universities. according to the amount of traffic users of its toolbar generate. and medical expenses to high-school trips. Alexa. As of August 2012. Antabio was able to finance a key step in the validation of its drug-candidate molecules." Brewskies – BeerBankroll is your destination if you want to help fund a small brewery. crowdfunders were nowhere near challenging the top 10 megasites like . Science – Still in its infancy. World Crowdfund Federation." Biotech – On October 1. engineers. which effectively lifted a previous ban against public solicitation for private companies raising funds. Among the nascent bureaucracies there is now a National Crowdfunding Association (NLCFA). National Crowdfunding Association of Canada. for everything from weddings to funerals. largely as a result of the 2012 passage of the Jumpstart Our Business Startups (JOBS) Act. nonprofits. Kapipal teams up with PayPal to finance just about anything. it's headed up with a bullet. Initially funded by more than 200 small investors. designing. and Crowdfunding Professional Association (CfPA). RocketHub's #SciFund Challenge was the first crowdfunding initiative to support science projects. biopharmaceutical antibacterial drug-discovery company Antabio. auto enthusiasts and other passionate minds toward developing unique. They work with an Internet community of more than 20. customer-centric offerings. The CfPA offers a course in Crowdfunding 101 and sponsors a Crowdfunding Bootcamp to teach entrepreneurs how to master the process. refining and developing vehicle ideas. and WiSEED. So red-hot is the sector that a whole secondary support network has popped up out of nowhere. science crowdfunding has many researchers excited about the possibilities. While crowdfunding does not yet have the Web presence of some other services. Cars – According to Gizmag." They're currently working with BMW to crowdsource the Beamers of the future. a leading Web information company. Greedy or Needy aims to fund make-a-wishes without the necessity of going through a big foundation.
Though crowdfunding sites claim to do detailed background checking before clearing a project to be posted. it is widely expected to stick some fingers into this rapidly baking pie as soon as the next few months. "Coming up with a truly worthy LED bulb is enormously complex. Fundable (60. spent much more than that in development. So maybe Lifx can deliver the goods for $1. the bulb is a monster Kickstarter hit.394). energy efficient. But investors should probably be at least a little skeptical that they'll ever be dimming the room lighting with their phones.424). and to start shipping finished product by next March. in return for which they'll get… well. warning that fraudsters could use it in new scams involving such unexplored territory as precious metals. it was promised in October of 2011 and still hasn't arrived.Google. Though the SEC has yet to set any hard-and-fast rules in place regarding equities.. Wikipedia. in reality this is fertile new ground for scam artists. Questions about crowdfunding campaigns involving unaccredited investors and private companies are being closely examined in Washington. So far. NASAA included crowdfunding on its list of worries. Unfortunately. . This year. Facebook. Regulation of securities issuance is another sticky topic. which won a $10-million government prize by marketing the first LED bulb. real estate. Crowdtilt (133. and the project is oversubscribed. 25-year LED light bulb that you control with your iPhone or Android. for one. requiring expertise in physics.. and that the stock those companies are offering is often not intended to be traded on any recognized exchange. Private offerings for oil and gas drilling.798). Further. Complicating the matter is that due diligence can be very hard if not impossible for a prospective investor to do prior to offering startup money for a new company. YouTube. some bulbs. which intends to develop a dimmable. But what of the cons? Well. chemistry.3M. Rounding out the ten most-visited crowdfunders were GoFundMe (10. in August the Massachusetts Securities Division charged a Lowell man in a crowdfunding scam. alleging that he had bilked 20 investors – who thought they were putting money into a gaming site – out of more than $150. Backers have thought so highly of it that they've ponied up more than $1. and manufacturing. Once they're in production. Pros and Cons… and Cons The pros of crowdfunding – the Internet's P2P ability to unite worthy projects with seed capital. WiFi-enabled. In fact. and Amazon. crowdfunder (105.892). in the absence of conventional funding sources. and bring dreams to life – are obvious. the Switch bulb. the North American Securities Administrators Association (NASAA) publishes an annual list of emerging threats to investors. which are not SEC-registered." One of the early entrants into the space. Phillips. has received an eightfigure investment from one VC company alone.977). there are also going to be ideas (including possibly some great ones) for which the funding goal is unrealistic. optics. as the Reuters piece pointed out. multicolor. Although not overtly fraudulent. GiveForward (52.149). design. ChipIn (28.246). and good for them if they can.447). and appbackr (125. there's fraud. Twitter. But Kickstarter was in 748th place. followed by Indiegogo (#1. Talk about ambitious.3 million. RocketHub (47.383).000. A September Reuters article discussed a Kickstarter project called Lifx. are another area of concern. and promissory notes.
at least for the time being. producing the product. post a project that infringes on someone else's patent or intellectual-property rights. instead of bulbs or other manufactured goods that may not show up. check them out for purposes of portfolio diversification if you'd like to – or crowdfund your own pet project.e. and they may interest readers who are willing to do their homework. we're sure. since more than half of all new small businesses fail within five years. Most basement innovators probably haven't patented their ideas before presenting them to the waiting world. it would seem sensible to find one in your immediate area. The reverse is also possible. we're optimistic. knowingly or unknowingly. Investment Implications Crowdfunders may facilitate transfers of newly minted stock to investors. provided that forthcoming government regulations don't make it too difficult for these sites to thrive.posted on Today at 02:26by Tyler Durden . which means there's nothing to prevent someone with deeper pockets from stealing the idea. On balance. but they don't sell stock in themselves.If. there are some income-producing sites. so you can check it out with your own boots on the ground. By all means. though. you're looking for a return on capital – i. However. so there are no opportunities here. All of these potential drawbacks will eventually work themselves out in the marketplace. Should you wish to make such an investment. and getting it to market first. Then there is intellectual-property theft. Some Casey Research employees are invested in them. Someone may.. that have been very successful at returning a decent yield. like Lending Club. According to a recent story in Wired. zero hedge . this has happened on Kickstarter at least five times since April. investing in a startup that's offering stock – you are also likely to be disappointed.
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