Across the globe, the term “crowdfunding” has become a buzzword in the field of financial innovation to raise capital for a project or an idea, often through a website. While crowdfunding spurs creativity, innovation, and new entrepreneurial ideas, there are some serious concerns attached to it.
Just last month, two London-based restaurants opted to raise debt from the bond market through Crowdcube, a crowdfunding website, which has around 75,000 users registered on its online platform. Chilango, a Mexican chain of restaurants is planning to gather up to £3 million by selling its fixed-income security through crowdfunding. The Mexican restaurant plans to offer a five-year bond, which will yield 8% per annum and will also include a free burrito every week for those investing more than £10,000.
Following Chilango’s footstep, another restaurant chain founded by renowned celebrity chef, Hugh Fearnley-Whittingstall, also crowd funded £1 million by selling bonds. However, these bonds also raise some red flags, since they are not secured, which can be a serious cause of concern in case of a default. Moreover, there is also an absence of a secondary market, where these bonds can be traded conveniently.
In the US, the Jumpstart Our Business Startup Act (JOBS Act), passed by Congress in April 2012, has been channelized effectively by the state of Indianapolis. A couple of days ago, the Hoosier state became one of the very few states in the US to implement its own independent equity crowdfunding law, allowing intra-state investment in crowdfunding.
Governor Mike Pence signed the Invest Indiana Crowdfunding Exemption around three months ago, which allowed entrepreneurs to raise as much as $2 million from people living in the state through the Internet. Investors have the option to contribute as much as $5,000 at one time. The crowdfunding bill will promote economic growth and provide new opportunities as more investment activity takes place.
Following the passage of the Washington Jobs Act of 2014 in March, the state of Washington seems to have joined the ranks of those supporting the crowdfunding revolution. The legislation essentially allows small businesses in the state to raise funds through equity crowdfunding. Investors with an annual income of $100,000 can give as much as $2,000 or 5% of their annual income or net worth. For investors with higher annual incomes, the investment limit goes up from 5% of income to 10%. The legislation also provides an option for businesses in the state to raise as much as $1 million through crowdfunding sources.
Since the inception of this technology, crowdfunding websites like Kickstarter and Indiegogo have been able to raise $1 billion for small businesses through their platform. The crowdfunding trend is also penetrating the Chinese market, where JD.Com Inc (ADR) (JD) launched its own crowdfunding portal this week, known as “Feniziqian.” In its initial phase, 12 projects have been listed on the website. The website follows a similar model to Demohour, which is currently the largest Chinese crowdfunding website. Rival e-commerce giant Alibaba Holdings has also launched its own crowdfunding product for domestically-produced movies.
The crowdfunding industry is expected to inject over $65 billion and create more than 270,000 jobs this year. By 2020, crowdfunding is expected to generate around $3.2 trillion in economic value per year, and generate 2 million new jobs. In the past five years, crowdfunding has grown at an exponential rate of 1,000%, and this year, the industry is expected to grow 92%. Crowdfunding is expected to provide $10 billion in funding to startup companies alone.