What is crowdfunding used for?

At some time most people have heard of the term “crowdfunding”. But what does crowdfunding mean, and how is it used? Crowdfunding offers an alternative way to raise money as opposed to traditional banking.

Can anyone be a part of a crowdfunding campaign? Does it cost money to start a crowdfunding project? What are the different types of crowdfunding? These questions and other facts will be address in this post.

A brief history.

One of the earliest recorded crowdfunding campaigns was a 18th-century English poet named Alexander Pope. Mr pope wanted to translate Greek poetry into the English language. He asked some of his subscribers to pledge money in exchange for recognition in an early edition of the book. This type of crowdfunding is going on today very much in the same manor as Mr Pope’s project in 1713.

Who can start a crowdfunding campaign?

Most crowdfunding platforms have a terms of use page that details the requirements of who can use that platform. The take away here is that users must be of legal age ( usually 18 years old). If you are younger than 18 a parent or adult may operate a campaign on your behalf.

How much is the cost?

Crowdfunding platforms are businesses. Like any business they have bills to pay. Usually the platform is free. Fundpey.com, like most platforms is free to use. If a backer contributes to a campaign there is a percentage fee (5%) and a credit card fee (2.9% + .30 per credit card charge) that is assessed to the account. The creator ( the person who started the campaign) would get the remaining money. There are no out of pocket charges to the creator.

What are the different types of crowdfunding?

The 3 primary types are donation-based, rewards, and equity crowdfunding.

Donation-based crowdfunding

Donation based crowdfunding is not based on a financial return to the backers of a campaign. Usually these type of projects are of a personal nature such as disaster relief, medical bills, or a charity.

This type of crowdfunding is based on donations. The backers have no ownership percentage and are strictly donating funds based on a moral, social or environmental level.

Rewards-based crowdfunding

Rewards-based crowdfunding is a funding concept that “rewards” the investor for a contribution. This reward is not specific. and can be anything that the creator of the campaign wants.

Much like the donations-based model, the rewards-based crowdfunding model has no financial or equity return. Instead, a reward of a product or participation in the project is the standard.

Equity-based crowdfunding

This type of crowdfunding allows the backers to become vested owners of your company. The creator is trading equity in the company for donations to be made to the company. The owners of the product or service are willing to trade out part ownership in order to get the funds to complete their project. The backers are investing funds with the expectation of getting profits from the product or service.

Equity-based crowdfunding matured in 2012 with the JOBS act. Any American that is 18 years or older can invest in a equity-based crowdfund offering. As with any investment there is the potential of risks. Always review all documentation when considering investing.