Money Matters
Crowdfunding is a quick and easy way to support people.
Perhaps a friend is running a marathon for charity, or parents need money for their sick child. Your small contribution might help save someone’s life.
But there is more to crowdfunding than giving away £10 here or £20 there. As well as individuals requesting small donations, businesses and charities raise large amounts through crowdfunding, usually in return for a reward or profit. Many well-known names – including River Cottage, the Eden Project and Brewdog – started with crowdfunded money.
Anyone can try to raise money through crowdfunding: start-ups, small companies wanting to expand, community projects, voluntary groups and creative projects perhaps involving artists, film-making or music festivals. They use websites, such as Crowdfunder, which have been set up specifically to match donors and beneficiaries. These are called platforms and they charge fees, taken from donors, recipients or both. There are four types of crowdfunding. The simplest is donation crowdfunding: you give money to a person or charity because you support the cause. Often this is a pure donation but you might receive a gift such as a T-shirt. Gofundme and Justgiving are two well-known platforms for donation crowdfunding.
Next comes reward crowdfunding, where you expect to get something in return; perhaps a board game you are
helping to be developed. Here Kickstarter is a large platform.
The following two categories are far more risky: they are investments and you hope to profit from your contribution. You can still spend just a little, but you can also part with substantial sums of money – which you could lose.
One is debt-based crowdfunding, also known as peer-to-peer lending. Investors lend money to start-ups and expect to earn interest on the loan, via platforms such as Funding Circle, Zopa and Ratesetter.
Sometimes the loan is in the form of mini-bonds – an IOU from the issuer to the investor. These are so high risk, and investors have lost so many millions of pounds, that the Financial Conduct Authority (FCA) has permanently banned advertising mini-bonds.
Lastly, there is investment crowdfunding, where you receive shares for helping start-up companies get off the ground and so own a stake in the company. You hope eventually to sell your shares for a profit but there are no guarantees. Platforms in this market include Crowdcube, Seedrs and Triodos Bank. Triodos is an ethical bank and takes investments only for organisations designed to make an environmental, cultural or social impact.
There are numerous risks to your money with crowdfunding, and little protection. The business you support might go bust, you might not be able to sell your shares or the crowdfunding platform itself could collapse before it has handed on your money.
All crowdfunding falls outside the Financial Services Compensation
Scheme. Only investment and loan crowdfunding are regulated by the FCA.
You might read a heartbreaking story online about someone urgently needing money for an operation – but it could be a fraud. To be safe, donate only to people who you know are genuine and check out any companies you are tempted to fund.
However attractive the crowdfunding proposition sounds, only ever part with money you can afford to lose.