Crowdfunding is the process of raising capital for a business project, by using the Internet and various social media platforms, to reach out to a large group of people.
Typically, the crowdfunding model involves three parties:
- The project initiator/creator who proposes the project;
- The supporters/backers/investors, comprising individuals or groups of individuals, who support the project and ;
- The internet platform, which brings the parties together for launching the project by allowing supporters to make their contributions or donations online, and coordinating and managing fundraising activities.
There are currently four main kinds of crowdfunding models:
- Donation crowdfunding: supporters have a social or a personal interest for investing, without expecting anything in return;
- Reward cowdfunding : In return for a donation from supporters of a project, the project initiator typically gives some type of incentive for participation ;.
- Debt crowdfunding (or peer-to-peer lending): supporters receive the principal along with the interest payable and;
- Equity crowdfunding: supporters invest in the project in exchange for equity. If the project becomes successful, the value of their share will increase.
The Belgian Law of 18 December 2016 on crowdfunding entered into force on 1 February 2017.
The law aims at finding a harmonious balance between the need for a light crowdfunding regime (less expensive) and the need to protect investors by regulating platforms targeting Belgian investors by way of debt or equity instruments. Donation- and reward-crowdfunding are excluded from the scope of the law.
Key features include:
- Alternative finance service: The crowdfunding law introduces a specific status for equity and debt crowdfunding platforms referred to as “alternative financing platforms” and prescribes operating requirements (professional duties, information requirements, procedures on conflicts of interest and appropriateness tests) for both alternative financing platforms and regulated entities (credit institutions and investment funds) that engage in alternative financing activities;
- Higher thresholds for the prospectus exemption: The crowdfunding law provides for an exemption from the obligation to publish a prospectus for public offerings through an alternative financing platform for less than EUR 300,000 with a maximum of EUR 5,000 per individual investor (that used to be 3.000 per investor);
- Activation of tax advantages (tax shelter, tax reduction, exemption). Investments via a crowdfunding platform or a starter fund benefit from tax advantages that were already available for direct investments in startup companies.
Crowdfunding is a trending topic nowadays. Domestic and international media are increasingly reporting on crowdfunding as an alternative form of funding of projects and enterprises.
Successfully crowdfunded projects can indeed get huge amounts of attention, on social media and elsewhere, which can help startup grow beyond what the money raised alone could have done.
However, in any case, project initiators must be aware of the following risks before embarking on crowdfunding:
- Not succeeding: If the fundraising target is not reached, money collected during the campaign will have to be returned to investors in most cases.
- People copying the project: There is no protection of intellectual property on crowdfunding platforms. Initiators’ ideas are online for plenty of people to see and there is a risk of someone duplicating their proposition.
- Underestimating the costs: Proper budgeting and planning are vital. It is common to underestimate just how much time and resources crowdfunding takes. Some forms of crowdfunding may even create additional costs. For Crowdfunding, transactions are one time, and not continuous. Project initiators must learn how to balance the short-term influx of cash raised through crowdfunding efforts with the daily cash flow expense requirements of his business.
- Damage to reputation: As the market is now quite competitive, no doubt that experienced investors will be looking into the offering. Any error or under-preparation will reflect badly on the project initiators and their project or business.
- Responsibilities & liabilities: Dealing with a potentially diverse set of investors/supporters/backers brings different issues, expectations and demands. Not understanding a contributor’s rights, complaints handling or enforcement mechanisms can create problems, particularly with equity crowdfunding, which comes with some loss of control over your startup.