Crowdfunding - Exploit The Potential And Limit Your Risk

Crowdfunding is on the rise all over the world, and figures from Europe show that the amount of funds raised via crowdfunding grew by as much as 146% from 2012 to 2014. In Denmark, 339 projects were crowdfunded in 2014, and this number is expected to increase significantly in the coming years. Crowdfunding is part of the digital sharing economy concept, in which everybody can contribute funds to the entrepreneur projects that they wish to back. However, crowdfunding has developed into a professional funding method in line with the other methods of raising capital, with the consequent advantages and limitations.

At Kromann Reumert it is our impression that more and more start-up businesses consider crowdfunding to be one of their primary funding options and sales channels. We receive an increasing number of inquiries from investors requesting advice on how to handle potential investment objectives that either have been crowdfunded or operate a crowdfunding platform. In this KR Insight we will therefore focus on the clash between the sometimes informal crowdfunding and the established rules.

In the European Union, crowdfunding grew by averagely 146 % a year from 2012 to 2014, which brought the total 2014 amount up to EUR 2.96 billion (approx. DKK 22 billion). Crowdfunding is still more widespread in the US; in 2014, crowdfunding in the US totalled USD 9.46 billion (approx. DKK 64 billion). The largest crowdfunding growth can be found in Asia, which saw a 320 % growth in 2014. Source: Moving Mainstream - The European Alternative Finance Benchmarking Report, February 2015, University of Cambridge and Ernst & Young.

THE FOUR TYPES OF CROWDFUNDING

There are four different types of crowdfunding:

Debt crowdfunding (P2P lending): In debt crowdfunding the platform functions as a "marketplace" for loans where lenders can contribute to loans to businesses. The interest rate of the loan will normally be determined either by the platform based on a credit assessment of the borrower, or through an auction process among the interested lenders. Danish platforms include Lendino, Flex Funding and Kreditmatch. Equity crowdfunding: The idea behind equity crowdfunding is that the investor invests a cash amount in exchange for an equity interest in the business looking for funding. There are currently no Danish equity crowdfunding platforms, but the British Crowdcube and the Danish Bridgefunding are both trying to build up equity platforms in the Danish market. Reward crowdfunding: By using reward crowdfunding, the business will obtain a cash contribution to its project in exchange for a reward, for example in the form of the product developed by the business. Reward crowdfunding is the most widespread type of crowdfunding, and the most popular platforms in the Danish market include Kickstarter, Indiegogo and the Danish Boomerang. Donation crowdfunding: Donation crowdfunding is a pure donation (gift) to the business or organisation looking for funding. Various international platforms and the Danish Caremaker and Boomerang offer donation crowdfunding.

At a European Union level, debt crowdfunding (P2P lending) to consumers and reward crowdfunding rank first and second in terms of volume. In the Nordic countries, debt crowdfunding (P2P lending) to businesses has outpaced reward crowdfunding, which may be due to the limited number of reward crowdfunding platforms for Danish projects (by way of example, not until the end of 2014 did Kickstarter open up for Danish projects). Equity crowdfunding made its real entry into the Nordic countries in 2013, where the volume rose from practically nothing to EUR 2.9 million (approx. DKK 22 million) in 2013 and to EUR 3.7 million (approx. DKK 27 million) in 2014. Source: Moving Mainstream - The European Alternative Finance Benchmarking Report, February 2015, University of Cambridge and Ernst & Young.

ARE YOU ALREADY A PARTICIPANT IN THE CROWDFUNDING MARKET?

Are you already a participant, or are you planning on trying crowdfunding, then it is important for you to be aware of the issues that may result in dearly-bought experience and prevent a lucrative exit, and to know as an investor what you need to be particularly aware of in order to avoid buying a pig in a poke.

WHAT YOU NEED TO FOCUS ON

In Kromann Reumert's opinion, players in the crowdfunding market should particularly focus on the following:

Businesses looking for crowdfunding: Check your obligations and protect your rights Investors in businesses that have used crowdfunding...