What is Crowdfunding?

As defined by Wikipedia:

Crowd funding alternately, Crowdfunding (sometimes called crowd financing, equity crowdfunding, crowd sourced capital, or street performer protocol) describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. Crowd funding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company, movie or small business or creating free software.

As defined by RoC: 

Crowdfunding is a new medium by which start-ups and investors may connect to create a partnership by which to instigate and innovate much needed change in the world.  With the reform of antiquated legal constructs, start-ups will be able to meet investors of their own choice and no longer be held down by the obstacles of traditional forms of capital that have existed to date.

Crowd = large group of people
Funding = process of gathering funds

Crowd + funding = gathering funds from a large group of people.

This as a standalone concept has existed for decades when a company issues securities by either issuing debt or equity. Not to bore anyone who doesn’t care about this, but effectively this is how companies are legally allowed to gather investors and how investors are able to generate a return from investing in these securities.

Recently a new phenomenon was borne.  Regular people demonstrated extremely strong interest in funding projects that they thought were worthwhile or interesting and often in exchange for a gift of sorts instead of an actual financial return.  Certain websites have been able to target creative projects to get them funding and have demonstrated extreme success.

So what is the problem with start ups utilizing crowdfunding to raise money for start-ups?  Seems kind of bizarre that I’m not allowed to reach out to people and ask them to invest in my idea.  Especially with the power of the internet and social media, I should just go out and ask people in my network to invest, right? In the United States, you were not legally permitted to solicit ‘investments’ on the Internet or on a general basis without registering with the government.

So we are allowed to gamble and give away money for free, but we were not allowed to invest nominal sums of money in innovative and high impact start ups that we believe will either do extremely well or transform society for the better.

With the new legislation that has been passed by Congress, the future of finance already looks brighter.  While there are concerns that deregulation will lead to many issues with fraudsters, businesses and individuals transacting under false pretense and for dishonest purposes.  While this is a real risk, the entire industry will succeed under a self-regulatory cover, for crowdfunding to be a success for start-ups all the parties involved, both business and investor, need to do their best to create an environment and community that would weed out the bad seeds.