Crowdfunding is an alternative form of financing a new project by raising many small amounts of money from a large number of people usually facilitated by a means of the web platform. In recent years, there is a huge growth in a number of websites which are used to raise capital. Apart from raising funds, it is good for engaging with market and market testing. The best performing categories in crowdfunding sites are consumer products in tech space such as video games or products . This blog discusses some popular websites used to raise cash in ICT start-ups. It looks at the various ways a website is used to raise capital, charges various platform charges, the legality of crowdfunding.
The legal position of crowdfunding in Ireland
According to an information notice issued by Central Bank of Ireland in June 2014, crowdfunding is not a regulated activity. Therefore, Central Bank of Ireland’s codes of conduct and the protections doesn’t apply to the consumers such as Deposit Guarantee Scheme or the Investor Compensation Company .Complaints cannot be made to Financial Services Ombudsman.
As there is a lack of regulatory framework, there is a likelihood of financial abuse or scam. The unprotected risk of failure to deliver the final goods or service presents an issue as to why people invest in certain projects.
Crowdfunding Websites in Ireland
Launched by the people who developed websites such as iDonate, iFundraise to raise money for non-profit organisations, icrowdfund is for fundraising proposals. It offers two types of fundraising. All or Nothing, in which money is solely collected from pledgers if predetermined minimum money has been vouched for. The second is “Keep it all” by which funds are awarded to a project regardless of the minimum amount pledged. Rewards are submitted by the project creator. Contributors receive the rewards in exchange for the amount of money pledged. iCrowdFund also help in finding a mentor to bring experience and credibility to the project. For All or nothing, iCrowdFund charges a commission of 4% on all successful pledges. Whereas for Keep it All, they charge 6% on all processed contributions. Additional 3% plus €0.25 per transaction is deducted from total amount raised.
Fundit is a platform for raising money for creative ideas and projects with project creators having a bank account in Ireland and must comply with their guidelines . Funders can be from anywhere in the world. Technology-related products are allowed but not ones where development is subcontracted. Project creators should also demonstrate that they have a contact network so that they can spread the word about the project .Every idea or project must reach or exceed its target amount before the time expires. It is a non-profit organisation and charges a basic fee of 5% for running the website and 3 % for covering the transaction and other costs. There are no extra charges per pledge and no cover charge unless a project reaches its target in allocated time. So in total, successful projects are charged 8% of the total amount raised.
Linked finance is used by creditworthy enterprises to borrow € 5,000 to € 100,000. The loan can only be used to grow their business and is repayable in 36 monthly instalments by direct debit. Lenders can be Irish residents or companies registered in Ireland and should have an Irish bank Account. To ensure lowest interest rates paid on the loan, it holds an online auction. The interest rate paid depends on different factors such as current trading performance, future plans etc. Auction normally lasts 14 days after the request goes live. If the loan is fully funded within 14 days, the auction can be closed early. If the loan is only 90% funded of the requested value, the amount can still be processed by Linked Finance. However, projects receiving less than 90% funding in the competition period are removed from its website. It charges an application fee of €70 plus VAT to register. If a business enters a loan contract, they charge 2.5% of the total loan amount. The fee is deducted from the amount before a loan transfer is being made.
SeedsUps has a matching engine that uses proprietary algorithms and a patent-pending process to match multiple investors with early stage tech Start-ups with great business ideas .Start-ups can raise $ 25,000 to $ 500,000.It has “All or nothing” funding model with the listing period of 6 months. It helps in providing a valuable mechanism of feedback to Start-ups and reduced risk for investors. Project creators have to invite crowd to fund their projects by setting an Opportunity SnapShot™ to ‘Live’. Over a listing period, investors can bid between $1,000 and $ 25,000 and compete to get into deals setting the valuation of the start-up. The amount of equity given by start-ups depends on the interest. The greater the interest in the start-up, less equity is given away by the start-up to the investors. Once the offer has been received, Seedsup organises legal work to complete the process. There is no charge to join the SeedsUp community but a few matching fees applies for on-boarding, professional and legal services when the deal is completed. Generally, fees are consistent with traditional investment banking fees for similar transactions.
Kickstarter is a Benefit Corporation with a global community consisting of creators and backers. Creators have to use “Launch Now” feature or manual review to raise funds. However, the lowest acceptance rate for a successful project to launch is in Design, Food and Technology. Creators keep 100% ownership of their work and have complete control over their creativity and creative projects. Projects can be live on the site anywhere between 1-60 days with 30 days or less is the recommended by Kickstarter. It is all or nothing funding with creators offering rewards to their backers to share a piece of their project. No one is charged till the goal is achieved. If a project is successfully funded, the fees include 5% of the total fund raised and 3% + €0.20 per pledge of payment processing fees. Pledges under € 10 have a fee of 5% + € 0.05 per pledge.
Therefore, Ireland has all three types of crowdfunding available to start-ups to raise capital. Linked finance is debt-based in which borrowers’ application is reviewed and verified and the algorithm determines credit risk and interest rate. SeedsUps is equity based with investors receiving equity in return for collectively supporting efforts of an Individual or an organisation. iCrowdFund, FundIt, Kickstarter are all reward based with goals set by creators and from this backers receive rewards based on their pledges.
Furthermore, the variety of products listed is varied. It can be hard to be unique and get a campaign funded. Using the same network of supporters multiple times can lead to the network of being exhausted. The choice for a start-up to go for a certain platform can depend on their business model , what kind of backers are available on a platform and choice of a founder to sacrifice equity/shares.