Start-ups and innovative companies often find it difficult to access funding in a traditional manner, that is, from one source or few different sources of funding (such as by bank loans). An alternative approach for such companies to obtain funding in order to operate their business is the so-called ‘crowdfunding’.
Essentially, crowdfunding is a means for innovators and start-up companies to finance their projects and businesses by collecting funds from a large number of persons via a crowdfunding platform. Furthermore, crowdfunding can simultaneously serve the purpose of indirectly marketing and advertising a project to potential customers and gaining new and useful market insights.
The concept of crowdfunding predates the digital era. Individuals used to come together as a community to fund a communal project via subscriptions, fundraising events, and even door-to-door fundraising. However, nowadays crowdfunding mostly takes place on a crowdfunding platform: a website which provides project owners a platform to present their projects to be funded. The crowd (that is, the public) will be able to review the projects presented and if interested fund one or more of those projects.
Crowdfunding can take various shapes or forms, mostly differing in the manner that the investor is remunerated for funding a project. Such forms of crowdfunding include the following:
- Donation-Based Crowdfunding:
This is when a number of people fund a project (being a business, campaign, charity, etc.) for nothing in return.
- Rewards-Based Crowdfunding:
Unlike Donation-Based Crowdfunding, people funding a project under Rewards-Based Crowdfunding receive a reward as a remuneration. Rewards can be of various forms, such as tickets to a football match, campaign t-shirts, etc.
- Investment-Based Crowdfunding:
In this scenario, investors fund a crowdfunded project by investing and buying shares from the company presenting the crowdfunded project.
- Lending-Based Crowdfunding:
When lending funds to a crowdfunded project, the project owner agrees to repay the loaned funds together with the accrued interest to the lender.
As of yet, the latter two types of crowdfunding are regulated under the European Union Regulation for Crowdfunding Service Providers (the “ECSPR”), whereas other forms of crowdfunding are not. Therefore, as per the ECSPR to provide Investment-Based Crowdfunding services and/or Lending-Based Crowdfunding services, the service provider is required to be licenced from the Malta Financial Services Authority.
Should you require further information or assistance relating to the above, do not hesitate to contact us.