Crowdfunding is a way in which individuals and businesses raise
money to finance or re-finance their activities through online
platforms. These online platforms are often known as
"crowdfunding platforms" and they typically adopt either
a loan-based model or an investment-based model to attract a
broader range of individual funders.
Crowdfunding grew out of the 2008 financial crisis and was
initially viewed by many as a short term funding solution for
businesses seeking to raise debt finance in a market place where
the traditional lending institutions were holding on to their
capital. It was particularly difficult for start-ups and early
stage growth companies to raise finance during this period. The
culture was risk averse and start-ups are, by their very nature,
perceived to be risky. However, although initially seen by many as
a short-term fad, crowdfunding is now a recognised funding platform
that is gaining traction globally (mainly in the UK and the US).
It is part of an increasingly fragmented lending market which
is no longer dominated solely by the big global banks.
How does it work?
So how do these platforms work? Crowdfunding models are very
simple but seek to challenge traditional lending methods. The
online platforms give those seeking to raise funds access to
thousands of potential lenders and investors who are looking to
make a return on their money. Although the sums put on risk by each
lender or investor may be modest the available funding can quickly
grow and become quite significant when aggregated with the amounts
contributed by others.
Loan based Crowdfunding
The loan-based crowdfunding model is more closely linked to the
traditional lending model of the bigger banks and is sometimes
referred to as "peer to peer lending". Individual
investors lend modest sums of money for a set term with an agreed
rate of interest. Provided the business is successful, the
individual lender will receive interest together with the principal
amount loaned at the end of the term.
Investment base Crowdfunding
The investment-based crowdfunding model invites investors to
subscribe for shares in a company looking to raise funds. A
return on this investment is only likely to be received when a
market for trading those shares is established – such as when
the company lists on a regulated exchange or is sold. Equity
investors hoping that the company will return a dividend in the
meantime should recognise that, if investing in a start-up, any
such dividend payments are likely to be many years away.
Interestingly, despite the rise of the crowdfunding industry,
there is currently no crowdfunding platform operating in Jersey.
This is because most UK based crowdfunding platforms will only
accept applications from UK or EU incorporated companies.
Local start-ups and other businesses could therefore
potentially benefit greatly from the development of a crowdfunding
platform in Jersey. Once established there may also be scope
to scale-up a Jersey crowdfunding platform to benefit entities
off-island. This could therefore represent a real opportunity
As with any new financial service offering, a crowdfunding
platform would of course require appropriate oversight and
regulation. It is suggested that Jersey's existing legal
and regulatory framework could be readily adapted to accommodate
the crowdfunding model whilst continuing to safeguard Jersey's
Blue Chip international reputation. The sunrise regulation of
crowdfunding in the UK, which was developed by both law makers and
the UK's Financial and Conduct Authority, could perhaps prove
to be a useful template for Jersey in developing its own
So there you have it. Crowdfunding has been developing for
the last 8 or so years and is now well established in the UK and
the US. With Digital Jersey having recently identified Fintech as
one of its three main areas of focus for the development of
Jersey's digital economy, crowdfunding could well turn out to
be one of the keys to implementing that strategy, should we choose
to embrace it.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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