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John Hoffmire: The democratization of fund and equity raising

Published: Monday, Nov. 18 2013 12:00 a.m. MST

In the past several years, thousands of non-business groups and individuals have also used crowdfunding to realize their projects. These projects have come from categories including film and performing arts, music, energy and the environment, science and technology, and books and publishing. Many of these groups do not use equity-based crowdfunding, and instead ask for loans or donations.

In 2012, according to the marketing group Massolution, more than 523,000 individuals and groups in the U.S. created successful funding campaigns through crowdfunding. These individuals and groups have shown that those who do not prefer (or perhaps do not have access to) traditional ways of raising money may turn to crowdfunding as an alternative approach to gaining necessary funds. This unique lending or donation approach has produced novel results.

For example, funded projects are more varied in their respective fields, allowing a greater amount of artistic, charitable and other ideas to obtain necessary funding. Many short-term or one-off projects, such as events, are finding a large space in which to obtain funds. Also, lending through crowdfunding is less costly to the borrower.

Whether an individual wishes to invest, donate or lend, he or she can scan one of the 813 crowdfunding platforms throughout the world and choose an idea that he or she is passionate about. This democratization of fundraising creates opportunities for all types of ideas.

For example, the Web comic The Oatmeal raised $1.3 million through crowdfunding to build a museum to honor the creative inventor Nikola Tesla. Bret Ellis, Braxton Pope and Paul Schrader used the platform Kickstarter to raise $160,000 for the creation of their film "The Canyons." Researchers from the MIT Media Lab created an affordable, consumer-level 3D printer and raised $3 million for their product through crowdfunding.

Crowdfunding allows people who are interested in business, politics, the arts, technology or other areas to fund specific initiatives that they are passionate about. In a simple and powerful way, individuals can become investors in the ideas they believe in. In return, they may receive equity, payments on interest, gifts or nothing at all. Crowdfunding is changing the funding landscape by allowing anyone — and everyone — to become an investor or a participant of another type.

As final standards are created in the U.S. over these next few months to protect those who might be hurt by unethical crowdfunders, our hope is promoters might remember a few of the demographic groups that could be most easily deceived. There are several, and we will just mention one. Imagine older people who planned on retiring using interest income as part of the monies they meant to live on in their later years. Consider how low interest rates have gone and stayed. Project the risks that some old people might take when trying to make up for interest that they are not receiving.

Think about the less-ethical operators who may call older people who are lonely and engage them in conversation and lead them to the Internet where they may be able to invest in high-risk ventures through a crowdfunding platform. Envision these older people, who studies show are most likely to trust their analytical abilities and who have, in reality, lost a step. Conjure an outcome that sees some old people losing a part of their life savings, money they cannot earn back.

Yes, crowdfunding has a wonderful set of possible outcomes. But, as we democratize the fundraising and equity-raising world, may we also protect those who need protection.

John Hoffmire teaches at SaÏd Business School at the University of Oxford.

Tom Steele will finish his undergraduate degree at Brigham Young University and graduate with honors in April 2014.

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