Will Internet-based financing change how businesses raise capital?

Executive Summary

The explosive growth of social media and the Internet have paved the way for crowdfunding, a means of raising small amounts of money online from a large number of people without any financial intermediaries. Crowdfunding, say proponents, democratizes the fundraising process by helping start-ups, nonprofits, artists and others overcome barriers such as gender and geography to gain access to capital. Besides raising money, crowdfunding provides a way to test the popularity of a product or creative idea and solicit feedback from potential customers. In the United States, the JOBS Act of 2012 legalized investment crowdfunding, which allows for the issuance of debt or equity to both accredited and unaccredited investors. However, the rules implementing crowdfunding for the latter group have yet to be finalized. Some critics worry that ordinary investors will become victims of fraud or will simply make bad investment decisions, but the data remain too sparse to confirm those fears.

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Cortese, Amy, “Locavesting: The Revolution in Local Investing and How to Profit From It,” Wiley, 2011. A veteran business reporter examines the local investment movement and how it can benefit investors and businesses.

Cunningham, William Michael, “The JOBS Act: Crowdfunding for Small Businesses and Startups,” Apress, 2012. A crowdfunding consultant and economist explains the JOBS Act and how it can help small businesses and start-ups raise capital.

Milliken, Dave, “Crowdfunding in a Nutshell: A Concise History of Crowdfunding and How to Raise Money Today,” Amazon e-book, 2014. An entrepreneur and business consultant reviews the history of crowdfunding and the opportunities that will be available under the JOBS Act.

Neiss, Sherwood, Jason W. Best and Zak Cassady-Dorion, “Crowdfund Investing for Dummies,” John Wiley & Sons, 2013. Two crowdfunding consultants lay out the basics of equity crowdfunding for entrepreneurs and investors.


Blackman, Andrew, “Real-Estate Crowdfunding Finds Its Footing,” The Wall Street Journal, April 13, 2014, http://tinyurl.com/lrkhytj. Article discusses the growth of real estate crowdfunding platforms that are attracting the interest of small investors.

Casserly, Martyn, “The top 5 Kickstarter success stories: Oculus Rift, Pebble smart watch, Ouya and more,” PC Advisor, Oct. 2, 2013, http://tinyurl.com/lgqdns7. Journalist profiles five top Kickstarter campaigns to understand the growing trend of crowdfunding.

Picker, Leslie and Noah Buhayar, “LendingClub Raises $870 Million in IPO Poised to Change Finance,” Bloomberg News, Dec. 11, 2014, http://tinyurl.com/qhzxn8a. Two reporters explain the significance of the $870 million IPO of Lending Club, a peer-to-peer lender.

Rosman, Katherine, “Crowdfunding Isn't Just for the Little Guys,” The Wall Street Journal, July 9, 2014, http://tinyurl.com/leb2aue. Bigger companies are turning to crowdfunding to test market demand for new products.

Saksa, Jim, “Kickstarter, but With Stock,” Slate, June 23, 2014, http://tinyurl.com/kn9sxv3. Lawyer/writer discusses the potential dangers of equity crowdfunding.

Shchetko, Nick, “Should Crowdfunding Sites Do More to Vet Projects?” The Wall Street Journal, Nov. 25, 2014, http://tinyurl.com/myha2pp. Journalist asks whether crowdfunding platforms should vet projects before they launch.

Solomon, Steven Davidoff, “SEC's Delay on Crowdfunding May Just Save It,” The New York Times, Nov. 18, 2014, http://tinyurl.com/mz9tvkp. Law professor says the growth of intrastate crowdfunding might prove the viability of equity crowdfunding.

Xu, Christelle, “Crowdfunding: Income or Gift?” Crowdfund Investment blog, Crowdfund Capital Advisors, Aug. 14, 2013, http://tinyurl.com/qzul7ck. Crowdfunding consultancy reviews tax implications of crowdfunding revenue and gives tips from tax experts.

Reports and Studies

“How Much Capital are Kickstarter and Indiegogo Hardware Projects Raising?” CB Insights, Aug. 11, 2014, http://tinyurl.com/lf7j5y2. Report from firm that tracks venture capital examines successful crowdfunded technology hardware projects that have gone on to receive venture capital investments.

Crowdfund Capital Advisors, “Crowdfunding's Potential for the Developing World,” World Bank, 2013, http://tinyurl.com/o423cn8. Report for the World Bank takes a global look at the potential for crowdfunding to improve the economies of developing countries.

Dorff, Michael B., “The Siren Call of Equity Crowdfunding,” Sept. 13, 2013; available at SSRN, http://tinyurl.com/mke6uph. Law professor looks at the poor performance of most angel investments and concludes that equity crowdfunding investments may fare much worse.

Greenberg, Jason and Ethan Mollick, “Leaning In or Leaning On? Gender, Homophily, and Activism in Crowdfunding,” July 3, 2014; available at SSRN, http://tinyurl.com/opaaqy6. Study examines the difficulty female founders face in getting start-up capital and why they are so much more successful at crowdfunding.

Mollick, Ethan, “The dynamics of crowdfunding: An exploratory study,” Journal of Business Venturing, January 2014, http://tinyurl.com/nn9s5gu. Management professor examines a data set of more than 48,500 crowdfunded projects and concludes that success is related to personal networks, project quality and geographical location.

Mollick, Ethan R., “Swept Away by the Crowd? Crowdfunding, Venture Capital and the Selection of Entrepreneurs” The Wharton School at the University of Pennsylvania, March 25, 2013, http://tinyurl.com/kwpgwqf. Author concludes that crowdfunders and venture capitalists assess entrepreneurial quality in similar ways, but that crowdfunding alleviates some geographical and gender biases.

Mollick, Ethan R., and Ramana Nanda, “Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts,” Harvard Business School Entrepreneurial Management Working Paper No. 14-116, June 20, 2014; available at SSRN, http://tinyurl.com/l8zzqfs. Researchers compare how the crowd and professionals evaluate artistic ventures and finds they use similar criteria.

The Next Step


Clifford, Catherine, “Food-Tech Startup Dinner Lab Is Crowdfunding a Cool $2 Million—From Its Customers,” Entrepreneur, Dec. 3, 2014, http://tinyurl.com/pwz4etc. Crowdfunding has enabled the founder and CEO of a food-focused start-up to pursue his own vision without ceding any creative control of his company to venture capitalists.

Kirsner, Scott, “A tale of two crowdfunding ventures,” The Boston Globe, Sept. 21, 2014, http://tinyurl.com/n9k6525. Two Boston-area crowdfunding campaigns demonstrate how some, but not all, entrepreneurs have been able to raise money online.

Robb, Alicia, “Why Crowdfunding Closes the Gender Gap,” Inc., December 2014-January 2015, http://tinyurl.com/p6cskzp. More female entrepreneurs are seeking backing through crowdfunding platforms, which have a relatively high proportion of female investors compared with venture capital and angel investor communities.


Fikes, Bradley J., “Science gets help from the crowd,” San Diego Union-Tribune, Nov. 5, 2014, http://tinyurl.com/mtbvzym. Some researchers who work for biotechnology laboratories that use crowdfunding platforms to raise money say the experience has improved their engagement skills with traditional investors.

Parmar, Neil, “Crowdfunding is Opening Investment Doors,” The Wall Street Journal, Nov. 9, 2014, http://tinyurl.com/mazb6pa. More investors are using crowdfunding websites, such as CrowdStreet and CircleUp, to purchase equity in real estate and consumer product opportunities that once were open only to larger investment institutions.

Weinstein, Joanna, “Crowdfunding real estate,” CNBC, Dec. 10, 2014, http://tinyurl.com/mr9vzj8. A real estate crowdfunding platform called iFunding allows accredited investors to search through development projects and choose between lending money to developers, with interest, or purchasing equity in their projects.


Dave, Paresh, “Gamers' funding fuels meteoric rise of ‘Star Citizen,’” Los Angeles Times, Oct. 19, 2014, http://tinyurl.com/mroancg. A massive crowdfunding campaign for videogame company Cloud Imperium to develop its “Star Citizen” game has enabled the company to spend its marketing budget on engagement programming, such as live events and video updates, for its backers.

Gumz, Jondi, “Fast start needed to generate buzz in crowdfunding efforts,” Santa Cruz (Calif.) Sentinel, Dec. 27, 2014, http://tinyurl.com/n6eushg. Founders of Santa Cruz, Calif.-based companies with crowdfunding experience say the success of a campaign is tied to the size of a project's fan base, its social media marketing presence and its engagement with backers.

Schultz, E.J., “Newcastle ‘Crowdsources’ Local Super Bowl Ad,” Advertising Age, Jan. 12, 2015, http://tinyurl.com/mnp7fhp. Heineken is funding a Super Bowl advertisement for its Newcastle Brown Ale brand by offering to include other companies' logos in the ad in exchange for contributions.

Successful Campaigns

Bajarin, Tim, “Pebble and Glyph: How Crowdfunding Is Creating Disruptive New Products,” Time, Jan. 27, 2014, http://tinyurl.com/kahqrhh. Crowdfunding has enabled small companies to develop technologies, such as smartwatches and wearable video displays, that will lead to new consumer product categories, according to the president of a market intelligence firm.

Heber, Alex, “A Campaign To Teach Kids An Hour Of Code Has Just Smashed The Indiegogo Crowdfunding Record,” Business Insider (Australia), Nov. 5, 2014, http://tinyurl.com/lvoh95r. The “Hour of Code” campaign, launched on the crowdfunding platform Indiegogo in October 2014 to fund computer science education initiatives around the world, raised more than $2.8 million in about one month.

Tate, Ryan, “How You'll Fund — And Wildly Profit From — The Next Oculus Rift,” Wired, April 4, 2014, http://tinyurl.com/ogxdabx. Pending U.S. Securities and Exchange Commission rules will allow backers of crowdfunded projects to purchase equity shares in those companies, unlike investors in the Oculus Rift virtual reality headset, who put up $2.4 million but didn't benefit from the company's sale to Facebook.


Council of Better Business Bureaus
3033 Wilson Blvd., Suite 600, Arlington, VA 22201
Self-regulatory group that provides information about businesses to consumers, including warnings about scams.

Crowdfund Capital Advisors
1688 West Ave., #802, Miami Beach, FL 33139
For-profit advisory, research and education organization dedicated to promoting access to capital through crowdfunding.

Crowdfund Intermediary Regulatory Advocates
1345 Avenue of the Americas, New York, NY 10105
Advocacy and trade group for the equity crowdfunding industry.

Ewing Marion Kauffman Foundation
4801 Rockhill Road, Kansas City, MO 64110
Nonprofit research and grant-making organization that supports entrepreneurship.

National Crowdfunding Association
Trade association of crowdfunding professionals, portals, venture capital firms, angel investors, lawyers, accountants, software vendors, educators and students.

Securities and Exchange Commission
100 F St., N.E., Washington, DC
Federal agency that regulates the U.S. securities industry and is preparing regulations for investment crowdfunding for unaccredited investors.

National Federation of Independent Business
1201 F St., N.W., Suite 200, Washington, DC 20004
National advocacy and lobbying organization for small businesses.

North American Securities Administrators Association
750 First St., N.E., Suite 1140, Washington, DC 20002
Organization that represents state-level securities regulators.

Small Business Administration
409 3rd St., S.W., Washington, DC 20416
Federal agency that supports entrepreneurship and makes loans; offers online course, “Introduction to Crowdfunding for Entrepreneurs.”

U.S. Chamber of Commerce Foundation
615 H St., N.W., Washington, DC 20062
Nonprofit affiliate of the Chamber of Commerce, a business lobbying group, disseminates information on the economy and employment issues, including crowdfunding.

DOI: 10.1177/2374556815573233