Crowd funding
Encyclopedia
Crowd funding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

, to support efforts initiated by other people or organizations. Crowd funding occurs for any variety of purposes, from disaster relief to citizen journalism
Citizen journalism
Citizen journalism is the concept of members of the public "playing an active role in the process of collecting, reporting, analyzing and disseminating news and information," according to the seminal 2003 report We Media: How Audiences are Shaping the Future of News and Information...

 to artists seeking support from fans, to political campaigns, to funding a startup company
Startup company
A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets...

 or small business
Small business
A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships...

 or creating free software
Free software
Free software, software libre or libre software is software that can be used, studied, and modified without restriction, and which can be copied and redistributed in modified or unmodified form either without restriction, or with restrictions that only ensure that further recipients can also do...

.

History

The crowd funding approach has long precedents in the sphere of charity
Charity (practice)
The practice of charity means the voluntary giving of help to those in need who are not related to the giver.- Etymology :The word "charity" entered the English language through the Old French word "charité" which was derived from the Latin "caritas".Originally in Latin the word caritas meant...

. It is receiving renewed attention from both commercial and social entrepreneurs now that social media
Social media
The term Social Media refers to the use of web-based and mobile technologies to turn communication into an interactive dialogue. Andreas Kaplan and Michael Haenlein define social media as "a group of Internet-based applications that build on the ideological and technological foundations of Web 2.0,...

, online communities and micropayment
Micropayment
A micropayment is a financial transaction involving a very small sum of money and usually one that occurs online. PayPal defines a micropayment as a transaction of less than 12 USD while Visa prefers transactions under 20 Australian dollars, and though micropayments were originally envisioned to...

 technology make it straightforward to engage and secure donations from a group of potentially interested supporters at very low cost.

One of the pioneers of crowd funding in the music industry have been the British rock group Marillion
Marillion
Marillion are a British rock band, formed in Aylesbury, England in 1979. Their recorded studio output comprises sixteen albums generally regarded in two distinct eras, delineated by the departure of original vocalist & frontman Fish in late 1988, and the subsequent arrival of replacement Steve...

. In 1997 American fans underwrote an entire U.S. tour to the tune of $60,000, with donations following an internet campaign – an idea conceived and managed by the fans before any involvement by the band. Marillion
Marillion
Marillion are a British rock band, formed in Aylesbury, England in 1979. Their recorded studio output comprises sixteen albums generally regarded in two distinct eras, delineated by the departure of original vocalist & frontman Fish in late 1988, and the subsequent arrival of replacement Steve...

 has later used crowd funding with great success as a method to fund the recording and marketing of several albums, Anoraknophobia
Anoraknophobia
Anoraknophobia is Marillion's 12th studio album, released in 2001. Following the success of their previous North American tour, underwritten by the band's fans themselves, Marillion turned to their fans to finance the making of Anoraknophobia, asking them to pre-order the album before it was even...

, Marbles
Marbles (album)
Marbles is the 13th studio album from rock band Marillion, released in 2004. Unlike their previous studio album, Anoraknophobia , which was financed largely by a preorder campaign, it was the publicity campaign that fans financed for the album...

and Happiness Is the Road
Happiness Is the Road
Happiness Is the Road is Marillion's 15th studio album, released as two separate album-length volumes respectively entitled Essence and The Hard Shoulder. The overall playing time is 110 minutes , taking it to double album length...

.

Crowd funding in the film industry was pioneered by French entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc from company :fr:Guyom Corp. when they launched a public Internet donation campaign in August 2004 to fund their film, Demain la Veille (Waiting for Yesterday). Within three weeks, they managed to raise nearly $50,000, allowing them to shoot their film. It was the first structured Internet-based crowd funding initiative, involving a dedicated financing website and offering counterparts such as credits, DVDs, or presence on the shoot.

Four months later, on the other side of the Atlantic, Spanner Films
Spanner Films
Spanner Films is a small London-based documentary company founded by film director Franny Armstrong in 1997. Notable productions include the no-budget epic McLibel - the story of a postman and a gardener who took on McDonald's and won, with courtroom reconstructions by Ken Loach, and Drowned Out ,...

 started the production of its climate change documentary The Age of Stupid
The Age of Stupid
The Age of Stupid is a 2009 British film by Franny Armstrong, director of McLibel and Drowned Out, and founder of 10:10, and first-time producer Lizzie Gillett...

. Its team, headed up by Franny Armstrong
Franny Armstrong
Franny Armstrong is a British documentary film director working for her own company, Spanner Films, and a former drummer with indie pop group The Band of Holy Joy...

, successfully raised more than £900,000 over a period of five years (December 2004 to 2009, the date of release) to cover both the production and promotion of the film. The film’s crew worked at very low wages but also received crowd-funding “shares”. Under the terms of the crowd-funding contract the investors and crew are paid once a year for ten years from the release of the film.

Crowd funding's earliest known citation was by Michael Sullivan in fundavlog on August 12, 2006: "Many things are important factors, but funding from the 'crowd' is the base of which all else depends on and is built on. So, crowd funding is an accurate term to help me explain this core element of fundavlog."

Earlier, other and related definitions

Some advocate that crowd funding does not include investments, and only includes the categories of donations, memberships or pre-ordering of products, giving none of the contributors a future stake or monetary reward of any kind.
MediaWave debates whether or not crowd funding should be considered an investment: Crowd funding definition may however be restricted to pooling of resources together at the grassroot with a framework for rewards and for the purpose to initiate and or found an investment, where common desire and trust are the most important driving force for participation. Money contributed by group of individuals (large or small) without a framework for future stake may not be defined as crowd funding because such contributions pass only as donations.

There are questions about the legality of taking money from "investors" without offering any of the security demanded by legitimate investment schemes. Sites such as ArtistShare
ArtistShare
ArtistShare is a crowdfunding website and labelWharton Innovation and Entrepreneurship Consulted on 10/12/2011 for musicians and other creative artists which allows them to fund their projects utilizing a "fan-funding" model to allow the general public to directly finance, watch the creative...

, Kickstarter
Kickstarter
Kickstarter is an online threshold pledge system for funding creative projects. Kickstarter has funded a diverse array of endeavors, ranging from indie film and music to journalism, solar energy technology and food-related projects.-Model:...

, Pledgemusic
Pledgemusic
PledgeMusic is an online Direct-to-Fan / Fan-funded music platform utilising a Threshold Pledge System / Provision Point Mechanism, launched in August 2009, that facilitates musicians reaching out to their fan-base to financially contribute to upcoming recordings or other musical projects...

, and Funding4Learning
Funding4Learning
Funding4Learning is a "human capital oriented" crowdfunding platform for educational projects. Funding4Learning provides its users with fundraising tools for study, volunteering, as well as a diverse array of education related initiatives.- Concept :...

 have a failsafe. They hold funds in an escrow
Escrow
An escrow is:* an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of...

 account. If the nominated target isn't reached, all funds are returned to contributors. While sites such as RocketHub
RocketHub
RocketHub is an online crowdfunding platform for creative projects. Creatives including musicians, filmmakers, photographers, theatre producers/directors, writers, entrepreneurs, fashion designers, etc. use RocketHub to raise funds and awareness for particular creative projects and...

 and IndieGoGo
Indiegogo
IndieGoGo is a crowd funding site founded by Slava Rubin, Danae Ringellmann and Eric Schell in 2008. Its headquarters are in San Francisco, California...

 allow projects to keep all the funds raised.

Investors are given something for their money - so in a legal sense, they have paid for and received something.
The Tunnel is selling frames of film for one dollar each. Pioneer One gives you the theme music or a special edition download.

Micropatronage is a system in which the public directly supports the work of others by making donations through the Internet. In use as early as 2001, the term was popularized in 2005 by blogger Jason Kottke
Jason Kottke
Jason Kottke is an American blogger and former web designer currently living in New York City. He designed the Silkscreen typeface and has won a Lifetime Achievement Award as a blogger...

 when he quit his day job as a web designer and spent a year blogging full time, living off the voluntary donations of his readership. Micropatronage differs from traditional patronage
Patronage
Patronage is the support, encouragement, privilege, or financial aid that an organization or individual bestows to another. In the history of art, arts patronage refers to the support that kings or popes have provided to musicians, painters, and sculptors...

 systems by allowing many "patrons" to donate small amounts, rather than a small number of patrons making larger contributions.

In webcomic
Webcomic
Webcomics, online comics, or Internet comics are comics published on a website. While many are published exclusively on the web, others are also published in magazines, newspapers or often in self-published books....

s, micropatronage plays a large part in supporting both the author and the site itself, and it has become common in webcomics to see authors asking for donations from fans beyond a certain level of popularity.

Contemporary applications

Crowd funding is being experimented with as a funding mechanism for creative work such as blog
Blog
A blog is a type of website or part of a website supposed to be updated with new content from time to time. Blogs are usually maintained by an individual with regular entries of commentary, descriptions of events, or other material such as graphics or video. Entries are commonly displayed in...

ging and journalism
Journalism
Journalism is the practice of investigation and reporting of events, issues and trends to a broad audience in a timely fashion. Though there are many variations of journalism, the ideal is to inform the intended audience. Along with covering organizations and institutions such as government and...

, music
Music
Music is an art form whose medium is sound and silence. Its common elements are pitch , rhythm , dynamics, and the sonic qualities of timbre and texture...

, and independent film
Independent film
An independent film, or indie film, is a professional film production resulting in a feature film that is produced mostly or completely outside of the major film studio system. In addition to being produced and distributed by independent entertainment companies, independent films are also produced...

, and also for funding a startup company
Startup company
A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets...

. Community music labels are usually for-profit organizations where "fans assume the traditional financier role of a record label for artists they believe in by funding the recording process".

Since pioneering crowd funding in the film industry Spanner films have published a useful ‘how to’ guide.

Innovative new platforms, such as RocketHub
RocketHub
RocketHub is an online crowdfunding platform for creative projects. Creatives including musicians, filmmakers, photographers, theatre producers/directors, writers, entrepreneurs, fashion designers, etc. use RocketHub to raise funds and awareness for particular creative projects and...

, have emerged that combine traditional funding for creative work with branded crowdsourcing
Crowdsourcing
Crowdsourcing is the act of sourcing tasks traditionally performed by specific individuals to a group of people or community through an open call....

 - helping artists and entrepreneurs unite with brands "without the need for a middle man."

Approaches

An entrepreneur seeking to use crowd funding (example for seed money
Seed money
Seed money, sometimes known as seed funding, friends and family funding or angel funding , is a securities offering whereby one or more parties that have some connection to a new enterprise invest the funds necessary to start the business so that it has enough funds to sustain itself for a period...

) typically makes use of online communities to solicit pledges of small amounts of money from individuals who are typically not professional financiers. A range of variations are possible, for example:
  • The solicitation could be to back an idea with no direct material return offered to those making a pledge. This type of crowd financing has long precedents including artistic patronage
    Patronage
    Patronage is the support, encouragement, privilege, or financial aid that an organization or individual bestows to another. In the history of art, arts patronage refers to the support that kings or popes have provided to musicians, painters, and sculptors...

     and the normal activities of charity fundraising
    Fundraising
    Fundraising or fund raising is the process of soliciting and gathering voluntary contributions as money or other resources, by requesting donations from individuals, businesses, charitable foundations, or governmental agencies...

    . Sometimes a threshold pledge
    Threshold pledge system
    The threshold pledge or fund and release system is a way of making a fundraising pledge as a group of individuals, often involving charitable goals or financing the provision of a public good. An amount of money is set as the goal or threshold to reach for the specified purpose and interested...

     approach is used, in which all pledges are voided unless the threshold amount is reached before the deadline.
  • Another approach invites a display of sponsorship in return for the cash pledged. A widely documented internet-based example is The Million Dollar Homepage
    The Million Dollar Homepage
    The Million Dollar Homepage is a website conceived in 2005 by Alex Tew, a student from Wiltshire, England, to raise money for his university education. The home page consists of a million pixels arranged in a pixel grid; the image-based links on it were sold for $1 per pixel in blocks...

    .
  • The solicitation could be to offer a loan (microfinance
    Microfinance
    Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....

    ) e.g., Kiva
    Kiva (organization)
    Kiva Microfunds is an organization that allows people to lend money via the Internet to microfinance institutions in developing countries around the world and in the United States, which in turn lend the money to small businesses and students...

    .
  • Some kind of quasi-equity investment could be offered, though any such scheme would need to avoid falling under any applicable financial regulations regarding making an initial public offering
    Initial public offering
    An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

    . One such scheme was introduced in February 2010.
  • Straightforward equity investment. When multiple parties are involved, this can involve a lot of work. There are platforms to make this easier.
  • A threshold pledge system as above, but rewards are offered in return for gifts or donations.

Intellectual property on crowd funding sites

One of the challenges of posting new ideas on crowd funding sites is there may be little or no intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...

 (IP) protection provided by the sites themselves. Once an idea is posted, it can be copied. As Slava Rubin, founder of IndieGoGo said: “We get asked that all the time, ‘How do you protect me from someone stealing my idea?’ We’re not liable for any of that stuff.” Inventor advocates, such as Simon Brown, founder to the UK based United Innovation Association, counsel that ideas can be protected on crowd funding sites through early filing of patent applications, use of copyright
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...

 and trademark
Trademark
A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or...

 protection as well as a new form of idea protection supported by the World Intellectual Property Organization
World Intellectual Property Organization
The World Intellectual Property Organization is one of the 17 specialized agencies of the United Nations. WIPO was created in 1967 "to encourage creative activity, to promote the protection of intellectual property throughout the world"....

 called Creative Barcode
Creative Barcode
Creative Barcode is a nonprofit organization that allows members to share new ideas without the risk of unauthorized copying. It was founded in 2010. Members embed digital codes in creative works to indicate usage permissions. Private disclosure is made to other members who agree not to publicly...

.

Patent disputes

On September 30, 2011, the crowdfunding site Kickstarter filed a request for declaratory judgment
Declaratory judgment
A declaratory judgment is a judgment of a court in a civil case which declares the rights, duties, or obligations of one or more parties in a dispute. A declaratory judgment is legally binding, but it does not order any action by a party. In this way, the declaratory judgment is like an action to...

 against Fan Funded who owns U.S. patent , "Methods and apparatuses for financing and marketing a creative work". Brian Camelio
Brian Camelio
Brian Camelio is an American musician, guitarist, composer, producer, and founder of ArtistShare.Camelio is considered one of the fathers of crowdfunding and potentially "a post-modern Ahmet Ertegun" according to Bloomberg News...

, founder of ArtistShare, is the inventor on the patent. KickStarter says it believes it is under threat of a patent infringement lawsuit. KickStarter has asked that the patent be invalidated, or, at the very least, that the court find that Kickstarter is not liable of infringement.

Pros and cons

Proponents of the crowd funding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd
Wisdom of the crowd
The wisdom of the crowd refers to the process of taking into account the collective opinion of a group of individuals rather than a single expert to answer a question. This process, while not new to the information age, has been pushed into the mainstream spotlight by social information sites such...

. If it does achieve "traction" in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth
Word of mouth
Word of mouth, or viva voce, is the passing of information from person to person by oral communication. Storytelling is the oldest form of word-of-mouth communication where one person tells others of something, whether a real event or something made up. Oral tradition is cultural material and...

 promotion.

Against these advantages is the requirement to disclose the idea for which funding is sought in public when it is at a very early stage. This exposes the promoter of the idea to the risk of the idea being copied and developed ahead of them by better-financed competitors.

Another significant downside to crowd funding is the possibility of getting ensnared in various securities laws, since soliciting investments from the general public is most often illegal unless the opportunity has been filed with an appropriate securities regulatory authority, such as the Securities and Exchange Commission in the U.S., the Ontario Securities Commission
Ontario Securities Commission
The Ontario Securities Commission is a regulatory agency which administers and enforces securities legislation in the Canadian province of Ontario...

 in Ontario, Canada, the Autorité des marchés financiers in France and Quebec, Canada, or the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...

 in the U.K. These regulators can have different ways of determining what is and what is not a security but a general rule one can rely on (at least in the U.S.) is the Howey Test
Securities and Exchange Commission v. W. J. Howey Co.
Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 , was a case in which the Supreme Court of the United States held that the offer of a land sales and service contract was an “investment contract” within the meaning of the Securities Act of 1933, , and that the use of the mails...

. The Howey Test says that a transaction constitutes an investment contract (therefore a security) if there is (1) an exchange of money (2) with an expectation of profits arising (3) from a common enterprise (4) which depends solely on the efforts of a promoter or third party. Clearly, under this standard, any crowd sourcing arrangement in which people are asked to contribute money in exchange for potential profits based on the work of others would be considered a security. As such, the applicable investment contract would have to be registered with a regulatory agency (such as the S.E.C.) unless it qualified for one of several rule-laden exemptions (e.g. Regulation A or Rule 506 of Regulation D of the Securities Act of 1933
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...

, or the California Limited Offering Exemption - Rule 1001 (also known as S.E.C. Rule 1001)). The penalties for a securities violation can vary greatly and depend in large part on the amount of profit obtained by the "promoter," the damage done to the investors, and whether a violation is a first time offense. However, a violation may result in both civil and criminal penalties, a return of any profit made and sometimes a lifetime ban from work in the securities industry. According to Section 5 of the Securities Act, it is illegal to sell any security unless such a sale is accompanied or preceded by a prospectus that meets the requirements of the Securities Act.

Further reading

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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