Crowdfunding Basics: A Beginner’s Guide to Crowdfunding

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Crowdfunding Guide – What is crowdfunding?

Crowdfunding is the process of financing a project or venture by raising capital from many individual donors. The idea is to pool together small contributions across multiple sources typically the online community, and these will eventually add up to match the capital needed by a campaigner to kickstart a project. Here is a brief crowdfunding guide for you to read.

Is crowdfunding legal?

With more crowdfunding platforms coming about, there now exists a need for the financing method to be regulated by the government. In 2019, to promote national economic development, the Securities and Exchange Commission (SEC) approved the rules and regulations concerning crowdfunding. Click here to browse the actual SEC Memorandum. They understand that with the recent financial innovations, start-ups and small and medium-sized enterprises will gain greater access to funding. Moreover, this will also provide more investment options for the public.

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Who are the parties involved?

This financing option generally involves three parties:

  • Entrepreneur or project initiator: The project initiator is the one with the venture idea. This entity is also the one seeking to raise funds.
  • Supporters: The supporters or what others term as the backers are those who want to support the entrepreneur’s business idea through pledging or investing of their own assets.
  • Crowdfunding platform: The platform is the moderating organization that links the project initiator with the supporters. They provide an avenue for the entrepreneur to post about their venture and for supporters to view all available options.

Crowdfunding Guide – What are the different forms of crowdfunding?

According to the SEC Memorandum, there are four types of crowdfunding available in the Philippines. These types are applicable to international crowdfunding platforms as well.

  • Investment-based crowdfunding: With equity-based crowdfunding, the contributors become part-owners of the venture. In other words, they receive a stake in the company for the investment they make and generally receive a share of the profits in the form of dividends or distribution.
  • Loan-based crowdfunding: With loan-based crowdfunding, contributors lend money to individuals or companies and the latter is obligated to repay the loan at pre-determined time intervals with the corresponding interest rate due.
  • Donation-based crowdfunding: With donation-based crowdfunding, there is no financial return to the contributors. You can think of this as a form where individuals pool their resources to support initiatives with a cause. For example, fundraising activities for the charity, for disaster relief operations, or even to support a child’s education or medical bills.
  • Reward-based crowdfunding: With reward-based crowdfunding, contributors give money in return for a “reward” which is usually a product or a service that the company is offering.

With all that laid out, you are now in a better position to assess whether crowdfunding is for you and if so, which type of crowdfunding matches your preference. Learn more about the different crowdfunding platforms available here.

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Money Monkeys

Money Monkeys seeks to educate Filipinos on finance, entrepreneurship, and the rising fintech innovations. We provide easy to digest articles with the aim of raising financial literacy, cultivating a growth mindset, and harnessing the spirits of fellow entrepreneurs.

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