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Equity Crowdfunding

How Equity Crowdfunding Works

Crowdfunding is the process by which a large number of individuals make small monetary contributions into a single pool, ultimately funding a new venture or project. Early forms of crowdfunding can be traced back to the 17th century with popular application during the cooperative movement in the 19th and 20th centuries.

Today, the Internet serves as the primary infrastructure for crowdfunding. While the basic mechanics are unchanged, crowdfunding campaigns are structured differently based on the venture or product seeking capital. The four most common crowdfunding structures include reward-based, philanthropic, debt, and equity.

  • Reward-based Crowdfunding: Individuals back tangible consumer products, various forms of art work, and other ideas in exchange for early access to products, discounts on purchases, or other incentives. Kickstarter is an example of a rewards-based crowdfunding platform.
  • Philanthropic Crowdfunding: Individuals back a charity or non-for-profit fundraiser, providing funds to further a cause or movement. Crowdrise is an example of a philanthropic crowdfunding platform.
  • Loan or Debt Crowdfunding: Also known as peer-to-peer lending, individuals provide capital to businesses or individuals in exchange for interest payments and return of principal over a defined time period, similar to a mortgage or a car loan. LendingClub is a popular loan crowdfunding platform.
  • Equity Crowdfunding: Individuals make an investment in a new business venture in exchange for common or preferred equity. MicroVentures is an equity crowdfunding platform.

 

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