Crowd funding

Crowd funding (sometimes called crowd financing, crowd sourced capital, or street performer protocol) describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. Crowd funding occurs for any variety of purposes^[1], from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company or small business^[2] or creating free software.

History

The crowd funding approach has long precedents in the sphere of charity^{[citation needed]}. It is receiving renewed attention from both commercial and social entrepreneurs now that social media, online communities and micropayment technology make it straightforward to engage and secure donations from a group of potentially interested supporters at very low cost.

One of the pioneers of crowd funding in the music industry^{[citation needed]} have been the British rock group Marillion. In 1997 American fans underwrote an entire U.S. tour^[3] to the tune of $60,000, with donations following an internet campaign – an idea conceived and managed by the fans before any involvement by the band. Marillion has later used crowd funding with great success as a method to fund the recording and marketing of several albums, Anoraknophobia,^[3] Marbles^[4] and Happiness Is the Road.^[5]

Crowd funding in the film industry was pioneered by French entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc from company fr:Guyom Corp. when they launched a public Internet donation campaign in August 2004^[6] to fund their film, Demain la Veille (Waiting for Yesterday).^[7] Within three weeks, they managed to raise nearly $50,000, allowing them to shoot their film. It was the first structured Internet-based crowd funding initiative, involving a dedicated financing website and offering counterparts such as credits, DVDs, or presence on the shooting.

Four months later, on the other side of the Atlantic, Spanner Films started the production of its climate change documentary The Age of Stupid.^[8] Its team, headed up by Franny Armstrong, successfully raised more than £900,000 over a period of five years (December 2004 to 2009, the date of release) to cover both the production and promotion of the film. The film’s crew worked at very low wages but also received crowd-funding “shares”. Under the terms of the crowd-funding contract the investors and crew are paid once a year for ten years from the release of the film.^[9]

Crowd funding's earliest known citation^{[citation needed]} was by Michael Sullivan in fundavlog on August 12, 2006: "Many things are important factors, but funding from the 'crowd' is the base of which all else depends on and is built on. So, crowd funding is an accurate term to help me explain this core element of fundavlog."

Earlier, other and related definitions

Some^[who?] advocate that crowd funding does not include investments, and only includes the categories of donations, memberships or pre-ordering of products, giving none of the contributors a future stake or monetary reward of any kind. MediaWave debates whether or not crowd funding should be considered an investment: Crowd funding definition may however be restricted to pooling of resources together at the grassroot with a framework for rewards and for the purpose to initiate and or found an investment, where common desire and trust are the most important driving force for participation. Money contributed by group of individuals (large or small) without a framework for future stake may not be defined as crowd funding because such contributions pass only as donations.

There are questions about the legality of taking money from "investors" without offering any of the security demanded by legitimate investment schemes. Sites such as ArtistShare, Kickstarter, Pledgemusic, and Funding4Learning have a failsafe. They hold funds in an escrow account. If the nominated target isn't reached, all funds are returned to contributors. While sites such as RocketHub and IndieGoGo allow projects to keep all the funds raised.

Investors are given something for their money - so in a legal sense, they have paid for and received something. The Tunnel is selling frames of film for one dollar each. Pioneer One gives you the theme music or a special edition download. ^[10]

Micropatronage is a system in which the public directly supports the work of others by making donations through the Internet. In use as early as 2001,^[11] the term was popularized in 2005 by blogger Jason Kottke when he quit his day job as a web designer and spent a year blogging full time, living off the voluntary donations of his readership. Micropatronage differs from traditional patronage systems by allowing many "patrons" to donate small amounts, rather than a small number of patrons making larger contributions.

In webcomics, micropatronage plays a large part in supporting both the author and the site itself, and it has become common in webcomics to see authors asking for donations from fans beyond a certain level of popularity.^{[citation needed]}

Contemporary applications

Crowd funding is being experimented with as a funding mechanism for creative work such as blogging and journalism,^[12] music, and independent film,^[13][14] and also for funding a startup company.^[15][16][17] Community music labels are usually for-profit organizations where "fans assume the traditional financier role of a record label for artists they believe in by funding the recording process".^[18]

Since pioneering crowd funding in the film industry Spanner films have published a useful ‘how to’ guide.^[19]

Innovative new platforms, such as RocketHub, have emerged that combine traditional funding for creative work with branded crowdsourcing - helping artists and entrepreneurs unite with brands "without the need for a middle man."^[20]

Approaches

An entrepreneur seeking to use crowd funding (example for seed money) typically makes use of online communities to solicit pledges of small amounts of money from individuals who are typically not professional financiers. A range of variations are possible, for example:

• The solicitation could be to back an idea with no direct material return offered to those making a pledge. This type of crowd financing has long precedents including artistic patronage and the normal activities of charity fundraising. Sometimes a threshold pledge approach is used, in which all pledges are voided unless the threshold amount is reached before the deadline.
• Another approach invites a display of sponsorship in return for the cash pledged. A widely documented internet-based example is The Million Dollar Homepage.
• The solicitation could be to offer a loan (microfinance) e.g., Kiva.
• Some kind of quasi-equity investment could be offered, though any such scheme would need to avoid falling under any applicable financial regulations regarding making an initial public offering. One such scheme was introduced in February 2010.^[16]
• Straightforward equity investment. When multiple parties are involved, this can involve a lot of work. There are platforms to make this easier.
• A threshold pledge system as above, but rewards are offered in return for gifts or donations.

Intellectual property on crowd funding sites

One of the challenges of posting new ideas on crowd funding sites is there may be little or no intellectual property (IP) protection provided by the sites themselves. Once an idea is posted, it can be copied. As Slava Rubin, founder of IndieGoGo said: “We get asked that all the time, ‘How do you protect me from someone stealing my idea?’ We’re not liable for any of that stuff.” ^[21] Inventor advocates, such as Simon Brown, founder to the UK based United Innovation Association, counsel that ideas can be protected on crowd funding sites through early filing of patent applications, use of copyright and trademark protection as well as a new form of idea protection supported by the World Intellectual Property Organization called Creative Barcode.^[22]

Patent disputes

On September 30, 2011, the crowdfunding site Kickstarter filed a request for declaratory judgment against Fan Funded who owns U.S. patent US 7885887 , "Methods and apparatuses for financing and marketing a creative work". Brian Camelio, founder of ArtistShare, is the inventor on the patent. KickStarter says it believes it is under threat of a patent infringement lawsuit. KickStarter has asked that the patent be invalidated, or, at the very least, that the court find that Kickstarter is not liable of infringement. ^[23][24]

Pros and cons

Proponents of the crowd funding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd. If it does achieve "traction" in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth promotion.

Against these advantages is the requirement to disclose the idea for which funding is sought in public when it is at a very early stage. This exposes the promoter of the idea to the risk of the idea being copied and developed ahead of them by better-financed competitors.

Another significant downside to crowd funding is the possibility of getting ensnared in various securities laws, since soliciting investments from the general public is most often illegal unless the opportunity has been filed with an appropriate securities regulatory authority, such as the Securities and Exchange Commission in the U.S., the Ontario Securities Commission in Ontario, Canada, the Autorité des marchés financiers in France and Quebec, Canada, or the Financial Services Authority in the U.K. These regulators can have different ways of determining what is and what is not a security but a general rule one can rely on (at least in the U.S.) is the Howey Test. The Howey Test says that a transaction constitutes an investment contract (therefore a security) if there is (1) an exchange of money (2) with an expectation of profits arising (3) from a common enterprise (4) which depends solely on the efforts of a promoter or third party. Clearly, under this standard, any crowd sourcing arrangement in which people are asked to contribute money in exchange for potential profits based on the work of others would be considered a security. As such, the applicable investment contract would have to be registered with a regulatory agency (such as the S.E.C.) unless it qualified for one of several rule-laden exemptions (e.g. Regulation A or Rule 506 of Regulation D of the Securities Act of 1933, or the California Limited Offering Exemption - Rule 1001 (also known as S.E.C. Rule 1001)). The penalties for a securities violation can vary greatly and depend in large part on the amount of profit obtained by the "promoter," the damage done to the investors, and whether a violation is a first time offense. However, a violation may result in both civil and criminal penalties, a return of any profit made and sometimes a lifetime ban from work in the securities industry. According to Section 5 of the Securities Act, it is illegal to sell any security unless such a sale is accompanied or preceded by a prospectus that meets the requirements of the Securities Act.^[25]

See also

• Threshold pledge system
• Crowdsourcing
• Person-to-person lending

References

1. ^ Ordanini, A.; Miceli, L.; Pizzetti, M.; Parasuraman, A. (2011). "Crowd-funding: Transforming customers into investors through innovative service platforms". Journal of Service Management 22 (4): 443. doi:10.1108/09564231111155079.  (also available as Scribd document)
2. ^ "1st paragraph -- Crowd funding Pbworks". Michael Sullivan and pbworks consensus group. http://crowdfunding.pbworks.com/. Retrieved 2010-01-15. 
3. ^ ^{a b} "Anoraknophobia Pre-Order Press Release". http://www.marillion.com/press/anorak.htm. 
4. ^ "Album 13: The Next Big Idea". http://www.marillion.com/press/marblescampaign.htm. 
5. ^ "Calling the faithful for Album 15". http://www.marillion.com/preorder/. 
6. ^ http://mashable.com/2011/01/17/kickstarter-crowd-funding-infographic/
7. ^ http://9.mshcdn.com/wp-content/uploads/2011/01/kickstarter_graphic_v2-1.jpg
8. ^ "Age of Stupid: Making Of: Crowd-Funding launch, Dec 2004". http://www.youtube.com/watch?v=mfujb60ytUY&feature=player_embedded. 
9. ^ "Age of Stupid loan agreement". http://www.spannerfilms.net/sites/files/ageofstupid/Stupid_loan_agreement2008_0.pdf. 
10. ^ http://www.mediawave.tv/site/blogItem.cfm?item=248<MediaWave: "Crowd Funding. Hope or Hype?" (July 11, 2010)."
11. ^ TidBITS : Steal This Essay 3: How to Finance Content Creation
12. ^ funding-journalism/ "Crowdfunding journalism". idio. 2009-05-19. http://platform.idiomag.com/2009/05/crowd funding-journalism/. Retrieved 2009-05-15. 
13. ^ Teenagers' credit note approach to fund £1m film of Clovis Dardentor
14. ^ TIME article on Crowd Funding the 'Age of Stupid'
15. ^ TechCrunch. "Sponsume lets projects get off the ground with Groupon-style group funding model"
16. ^ ^{a b} TechCrunch 'Grow VC launches, aiming to become the Kiva for tech startups'
17. ^ BBC News 'Cash-strapped entrepreneurs get creative'
18. ^ Kappel, Tim, "Ex Ante Crowdfunding and the Recording Industry: A Model for the U.S.?" in Loyola of Los Angeles Entertainment Law Review, Vol.29, Issue 3, p.376
19. ^ Spanner Films : How to crowd fund your film
20. ^ Bell, Melissa. "Crowd-sourcing a brand", The Washington Post, March 12, 2011, accessed September 3, 2011.
21. ^ Mike Drummond, “Making it Rain: Seeking Seed Money from the Crowd”, Inventors Digest, August 2011
22. ^ Simon Brown, “Follow the Crowd”, Intellectual Property Magazine, July 2011
23. ^ Sarah Jacobsson Purewal, Kickstarter Faces Patent Suit Over Funding Idea, PCWorld, October 5, 2011. Consulted on October 6, 2011.
24. ^ Eriq Gardner, KickStarter Seeks To Protect Fan-Funding Model From Patent Threat, The Hollywood Reporter, October 4, 2011. Consulted on October 15, 2011.
25. ^ "Section 5 -- Prohibitions Relating to Interstate Commerce and the Mails". University of Cincinnati College of Law. http://www.law.uc.edu/CCL/33Act/sec5.html. Retrieved 2010-01-15. 

Further reading

• The micro-price of micropatronage, The Economist, 27th Sept 2010
• Putting your money where your mouse is, The Economist, 2nd Sept 2010
• The Geography of Crowdfunding, NET Institute Working Paper No. 10-08, Oct 2010
• Is There an eBay for Ideas? European Management Review, 2011
• A Guide to Crowd funding Success
• Ex Ante Crowdfunding and the Recording Industry: A Model for the U.S.?
• Huffington Post crowd funding blogs
• Cash-strapped entrepreneurs get creative in BBC News
• White Paper on Crowd funding
• Love a Local Business? Buy a Share - Sometimes it takes a village to fund a company.