What is Crowd Funding?

Also known as crowd sourced capital and crowd financing, crowd funding is the cooperation of a group to put forward money or other resources in order to help other people achieve something. Basically, an idea is presented by an individual or company, and people donate or invest money to help that individual or company make the idea a reality. For example, an entrepreneur might ask for money for a business start up, and the crowd gives money toward the start up, usually through a third party, if they believe it is a good idea. Crowd funding is common on the Internet where websites are built and maintained solely for this purpose. On some websites, the person is not granted the money unless enough people are willing to put forth money.

To start a crowd-funded project, a person normally details his or her idea, how much money is needed, and his or her capability of paying the money back, if applicable. This usually takes place on a website specifically designed for crowd funding transactions. If the idea seems solid and people pledge the majority or complete amount of money requested, the money is granted. Sometimes the idea or the person’s ability to pay back the money leads to few people pledging, in which case the money that was pledged usually goes back to the crowd and the person is left finding capital elsewhere. Occasionally, money is pledged toward a charity or in support of someone incapable of paying it back with no promise or expectation of something in return.

There are some highly touted positives to this financial option. One such positive is the ability for people or organizations to solicit investments from sources other than a centralized financial institution. If someone has an idea that a traditional bank might not be interested or comfortable investing in, he or she has the option of pitching it directly to individual investors.

One downside to crowd funding is the potential for legal complications, as this financial option essentially comes down to one party or parties selling a financial security to many other parties. Financial securities are generally a heavily regulated area that may be handled differently depending on the legal jurisdictions of the people involved and the specifics of the particular security. It is typically considered very important that any party engaging in this type of business transaction at any level makes sure that the project at hand is legal.