Understanding the Four Primary Models of Crowdfunding

Get Familiar with Equity, Lending, Reward and Donation Crowdfunding

Sorry, not those kind of models. But the four I will discuss are attractive and offer a uniqueness all their own.

Some investors may be familiar with the websites Kickstarter and GoFundMe, but they may not know one is rewards-based and the other is donation-based.  As an equity crowdfunding portal, we at truCrowd believe it is important for everyone to 1.) Be aware of and 2.) Understand the differences of the four primary models of crowdfunding.

models of crowdfunding

Four models – not particularly of crowdfunding, but just as diverse and unique.

I have chosen to share an excerpt from a short and succinct book on equity crowdfunding: “Investing in Equity Crowdfunding” by Stephen Laczniak. In his book, Stephen lays out a simple yet informative explanation of the all four primary models of crowdfunding. (Please note he references an article by C. Steven Bradfrod several times and I have provided links to both publications under the text)

(1) Equity Crowdfunding: Under the equity model, crowdfunders receive an equity interest in return for their contribution. Although some European funding portals, including CrowdCube and Symbid, have implemented equity crowdfunding, funding portals in the United States must await final rulemaking by the SEC. Nevertheless, US-based sites, including EarlyShares, StartupValley and 99Funding, for example, are already positioning themselves to take advantage of the CROWDFUND Act.

(2) Lending Crowdfunding: Also called “crowdlending”, lending crowdfunding encompasses two subcategories: (a) a return of principal only model, and (b) a return of principal plus interest model. A chief example of a “principal only” funding portal is Kiva. Kiva partners with microfinance lenders to make loans to entrepreneurs. Kiva distributes money to the microfinance lenders and credits the crowdlenders with any repayments of principal made by the entrepreneurs. Other portals offering “principal plus interest” include Prosper and Lending Club. This funding model is typically used to finance small personal and business loans. Prosper, for example, might facilitate a loan between a borrower who wishes to consolidate debt and lenders willing to take on that risk. For connecting borrowers to lenders, portals charge a loan origination fee and take a small percentage of payments. The actual interest rate charged to the borrower is determined through an auction process (Bradford, 2012).

models of crowdfunding

Oculus Rift, a virtual reality headset for 3D gaming, is one of the most successful rewards-based crowdfunding offerings of all time.

(3) Reward/ Pre-Purchase Crowdfunding: Under the reward/ pre-purchase model, a crowdfunder receives either a reward (e.g., a personal “Thank You” email from the entrepreneur or a customized T-shirt) or the actual product being funded (once the entrepreneur completes the project, of course). Critically, the crowdfunder does not receive a financial interest in the business: The crowd funder has no claim to interest, dividends or equity in the company because of his or her contribution. Leading examples of reward/ pre-purchase crowdfunding sites include Kickstarter and IndieGoGo (Bradford, 2012).

(4) Donation Crowdfunding: Under the donation model, the crowdfunder receives nothing in return for his or her contribution—the crowdfunder is simply making a donation to a project. And while many donation crowdfunding sites provide access to charitable projects and not-for-profit organizations, it is important to note that for -profit businesses may also seek donations through certain crowdfunding portals. Some examples of donation crowdfunding sites include DonorsChoose and GlobalGiving (Bradford, 2012).

Laczniak, Stephen, 2012. “Investing in Equity Crowdfunding.” CreateSpace Independent Publishing Platform.

Bradford, C. Steven, 2012. “Crowdfunding and the Federal Securities Laws.” Columbia Business Law Review.

I hope these explanations provide you a crystal clear view on the four primary models of crowdfunding. It is important to understand what incentive each model offers in return and what funding platform offers what type of crowdfunding.

Thank you again for reading and please leave all comments and questions below!


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