What Is Crowdfunding? A Complete Guide to How It Works
Crowdfunding is a method of raising money from a large number of people, typically online, to fund a project, cause, or business. While it feels like a modern concept, its roots go back further than most people realize.
The History of Crowdfunding
One of the earliest examples of crowdfunding occurred in 1884, when funds ran short for building the pedestal of the Statue of Liberty. Publisher Joseph Pulitzer used his newspaper to appeal to Americans to donate the money needed to complete the pedestal’s construction. Over $100,000 was raised in just six months from more than 125,000 people.
It took the internet, however, to truly accelerate this form of fundraising. According to a 2016 Forbes report citing World Bank data, crowdfunding in developing countries alone was projected to approach nearly $100 billion by 2025 — a sign of just how quickly the model was expected to scale.
How Does Crowdfunding Work? Understanding Its Roots
Traditionally, crowdfunding has been used to find donors who support the personal projects of artists, inventors, and filmmakers. In exchange, donors may receive:
- A perk or reward
- Public recognition
- An early version of the product
These tokens of appreciation are often tiered, becoming more valuable as a donor’s contribution increases.
Because this donation-based model wasn’t generally viewed as an investment, it largely escaped regulatory oversight or supervision.
Crowdfunding for Businesses: Equity and Debt Options
Until relatively recently, using crowdfunding to solicit investments from the general public wasn’t allowed. That changed with the passage of the JOBS Act of 2012 and subsequent rulemaking by the Securities and Exchange Commission (SEC), which opened the door to raising equity and debt capital through crowdfunding — a significant shift in how businesses can access capital markets.
This regulatory change created two additional forms of business crowdfunding:
- Equity crowdfunding – Investors contribute capital in exchange for an ownership stake in a business.
- Debt crowdfunding – Investors lend money to a business with the expectation of repayment, often with interest.
Crowdfunding Platforms Continue to Expand
Crowdfunding platforms have grown rapidly in number, and many are beginning to specialize — some focused on creative projects, others on equity investment, and others on debt-based lending for crowdfunding for small businesses.
As more people search for new financing choices and fundraising alternatives, crowdfunding continues to gain momentum. If you’re considering it — whether as a business owner raising capital or as an individual exploring crowdfunding investment opportunities — it’s strongly recommended that you research and evaluate any crowdfunding platform carefully before making a financial commitment. This is true no matter where you’re located, including here in Southwest Florida, where small business owners are increasingly exploring alternative financing options.
Frequently Asked Questions
What is crowdfunding?
Crowdfunding is a way of raising money for a project, cause, or business by collecting small contributions from a large number of people, typically through an online platform.
How does crowdfunding work?
A person or business creates a campaign describing their project or funding need, sets a goal, and shares it on a crowdfunding platform. Individuals then contribute money, sometimes in exchange for a reward, equity stake, or repayment, depending on the type of crowdfunding used.
What’s the difference between equity crowdfunding and debt crowdfunding?
With equity crowdfunding, investors receive an ownership stake in the business in exchange for their contribution. With debt crowdfunding, investors lend money to the business and expect repayment, typically with interest, rather than receiving ownership.
Is crowdfunding regulated?
Traditional donation-based crowdfunding has generally not been subject to significant regulatory oversight. However, crowdfunding used to raise investment capital — such as equity or debt crowdfunding — is regulated by the SEC following the JOBS Act of 2012.
Can small businesses use crowdfunding to raise capital?
Yes. Since the JOBS Act of 2012 and related SEC rulemaking, small businesses have been able to use crowdfunding platforms to raise equity or debt capital from the public, in addition to traditional donation-based campaigns.
