Crowdfunding is a way through which private corporations raise capital for their operations by selling securities to the public. Crowdfunding, therefore, comprises the sale of shares, convertible notes, debts, tokens, and other financial securities. In the financial market, it is probably one of the newest investment tools. Investing in crowdfunding is also highly regulated by the government to make sure investors’ interests are safeguarded.
To invest in crowdfunding, investors must understand how it works. The financial market can be complex in many aspects, and if an investor does not know how their investment works, they could be prone to huge financial losses. That said, crowdfunding works by investors looking for corporations that meet their investment criteria. After identifying a suitable firm to invest in, the investor visits a funding portal page where they get all the details about their prospective investments.
Crowdfunding is a more inclusive form of raising capital because it is less restrictive compared to IPOs that have high standards and requirements. Initially, firms could only raise capital from the public through IPOs and this locked out many firms and investors. IPOs are only suitable for large corporations and wealthy investors. For this reason, crowdfunding was developed to cater to the needs of smaller businesses, including startups. Crowdfunding also allows middle-class individuals to invest because not much money is required.
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Types of Crowdfunding
Below are the various types of crowdfunding:
This is where businesses raise capital for their operations by exchanging money for various forms of rewards like free services, recognition, etc. Basically, a firm invites the public to give them monetary support in exchange for various rewards from the firm. Rewards crowdfunding is what is witnessed in Kickstarter or Indiegogo.
This includes different types of lending, such as peer to peer lending and invoice financing. Debt crowdfunding platforms help firms to raise capital from all over the world in the form of outsourced loans from the general public. The firms pay the money bank at small interest rates as per the agreed terms and conditions. The public can gain profits for their investments once the firms repay the loans at interest.
This type of crowdfunding works by raising money for a firm from the public in exchange for equity. It is basically selling a part of the ownership of the business to raise money for operations. Equity crowdfunding has more strict regulations than other types of crowdfunding. The purpose of strict regulations for this type of crowdfunding is to make sure that the interests of investors are safeguarded.
Crowdfunding is the way to go, especially for small businesses that do not qualify for many other sources of capital. It is a great way of stimulating economic growth by encouraging the growth of SMEs. Many small businesses collapse due to the lack of capital, but crowdfunding has been introduced to solve that problem. Additionally, investors who do not qualify to participate in the stock market have a chance to invest in private firms through crowdfunding.
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