Crowdfunding Investment

The merit of crowdfunding is that it allows individuals and companies to raises funds easily from the public without the intervention of intermediaries.

Crowdfunding can be classified into four types: donation, credit, compensation, and equity. The donation type is for the purpose of donation without any compensation. The credit type provides microfinance to individuals and entrepreneurs for the purpose of collecting interest. Individuals invest in funds promoted by fundraisers and obtain non-monetary compensation in the compensation type. The compensation type is widely deployed in industries such as performance, music, movie, education, and environment. Equity type is similar to investing in venture capital in that people invest in startups for acquiring the shares.

The popularity of equity-type crowdfunding has been consistently increasing. This type of crowdfunding has encouraged individual investors to invest in venture capitals, which had been limited to professional investors and institutions. The earliest equity crowdfunding platform was ASSOB (Australian Small Scale Offerings Board), founded in 2007. ASSOB funded 176 companies with more than 150 million US dollars; 78% of the funded companies were operating successfully at the end of 2017.

Crowdfunding transactions in the U.S. are estimated to be worth $1.04 billion in 2018, and the average annual growth rate from 2018 to 2022 is forecasted to be 10.4%, and is expected to reach $1.55 billion in 2022. (Source: statista, December 2017)

Although the crowdfunding market has been developing rapidly, people are concerned that the development may be going at the wrong direction. For example, entities providing donation-type crowdfunding services are actually providing credit-type crowdfunding services, and their interest rates are much higher than the local interest rate. It seems that the modern crowdfunding has detoured from its original purpose that Grameen Bank, one of the earliest pioneer in crowdfunding, had established; the unsecured low-interest microfinance seems outlandish in today’s crowdfunding system.

Moreover, there are many loopholes in the current laws that regulate the public offerings and investors. For example, there is a strict regulation for verifying individual’s credibility, but corporate’s accountability are often left unverified. Therefore, investors cannot judge the credibility of a company’s information from a public funding platform. As a result, investors often bear the brunt of potential risk in crowdfunding.