CORPORATE

Follow the “Crowd”

The term “Crowdfunding” is one which has become extremely prevalent in the business world, and which is used by some of our best recognised tycoons - but what does it mean and how can it work for you?

“Crowdfunding” is the general term for a company or individual using an online platform to finance a new product or idea.

Details of their idea or plan are pitched to potential investors; the “crowd”. The pitch will explain in layman’s terms what their product or service is and why it will be worth investing in. The “crowd” then decide whether to invest in the idea or not.


There are four types of Crowdfunding:-


1. Donation Crowdfunding;
2. Rewards Crowdfunding;
3. Debt Crowdfunding; and
4. Equity Crowdfunding.

Each type of Crowdfunding has a different purpose and will suit different situations.

1. Donation Crowdfunding is something that everyone will have come across on websites such as Just Giving. The main purpose of Donation Crowdfunding is to raise funds for a non-profit cause such as a charitable project or specialist medical care for a specific individual. The “crowd” here are called “Donors”.

2. Reward Crowdfunding aims to gather “Backers”. Backers will contribute investment in return for a “reward”. This method of Crowdfunding may be appropriate for companies launching a new product. It may be that depending on the size of the investment made, Backers are “rewarded” with invitations to exclusive events such as the product launch party or even with discounts off the product or service.

3. Debt Crowdfunding is where “Lenders” grant loans of various amounts to a company or individual for a particular purpose in return for being paid back along with interest. The idea is that a larger amount can be raised through multiple small investments rather than one large investment which may be difficult to obtain. Debt Crowdfunding is regulated by the Financial Conduct Authority (FCA).

4. Equity Crowdfunding is where, most likely, venture capitalists make an investment in a company in return for an equity share in that Company. “Investors” should be aware of the risks involved with equity investment. For this reason the majority of Investors will generally have a background in the particular industry and some Crowdfunding platforms have certain restrictions on who can invest i.e. those with the experience and knowledge to make an informed decision.

Equity Crowdfunding can be used for both start up companies, and companies who wish to grow and is regulated by the FCA.

Why Crowdfund and how to do it?

Traditionally, funding for a business idea involves asking banks for large sums of money, some of which may have significant strings attached. Crowdfunding offers an alternative option for raising cash.

For start up companies, Reward or Equity Crowdfunding can be an interest free way to raise capital in the early stages of a business in return for the rewards or shares offered.

There are numerous online platforms through which you can Crowdfund and each provide a tailored service to best meet the needs of you or your business.

The Crowdfunding campaign will only be live for a limited length of time and you can set a target amount to raise. Owing to the short lifespan of a Crowdfunding campaign, it is good to build momentum about the investment potential before going live, for example, through social media.

Why Invest?

Crowdfunding can offer high annual returns for those investors in a position to benefit from the tax relief available and the opportunity to spot the “next big thing!”

There are two different types of tax relief:

SEIS (Seed Enterprise Investment schemes) for investing in very early stage start ups; and

EIS (Enterprise Investment schemes) for investing at a later stage. 

For sizeable investments in particular, you should seek independent advice on additional safeguards and agreements with the funder, as well as on the potential tax reliefs, valuations and documentation.

If you are a business or individual interested Crowdfunding, please get in touch with our Corporate team who will be happy to help.


 

 

 

 

 

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

 

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