Crowdfunding Crowdfunding

Crowdfunding

Raising funds in the digital age 

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Crowdfunding is a collective form of funding, a collaborative process by a group of people who use their own money to support the efforts of people and organisations.

The Web, the complex system that connects us to millions of people around the world and allows us to immediately share a photo when it is taken, is also the system that, for a few years, has enabled the collection of funds and financing through its network.

A dream, a project or a goal to achieve is shared on the Web and supported by a crowd of people. But how is this possible?

How crowdfunding works

All of us, some more than others, talk about our life and what we do on social networks. Why not use this valuable network of contacts to fund our projects?

A small project such as publishing a book or a large project such as opening a successful business can be financed by raising funds on the Web thanks to crowdfunding.

People have used crowdfunding to raise funds in order to restore works, obtain adequate funds to make a film, fulfil a dream or even organise a wedding. The aim of crowdfunding is to explain why you need to raise funds, declare your intentions, get people to take part and encourage Web users.

But why would anyone want to fund someone else’s project?

Angelo Rindone of Produzioni dal Basso, the oldest Italian crowdfunding platform set up in 2005, explains: “First of all, we need to explain. Many types of crowdfunding exist: the most widespread in Italy is reward-based crowdfunding, which aims to finance well-defined projects and offers something in return to reward contributors such as a book, a DVD, tickets for a show or a subscription to a magazine. In most cases, the reward is the object, book or film that is to be created with the money raised by crowdfunding. One of the reasons why people are encouraged to fund is that they are interested in the end product. Another reason, which is just as important for those who use the Produzioni dal Basso platform, is that they believe in the project and in its social value, aside from the object that is the reward”.

How does it work? The mechanism is very simple:

•   You choose a crowdfunding platform (in Italy there are 41 active platforms and 13 now being launched) and explain the project that you intend to implement.

•   You calculate how much it will cost and how many contributions it can be divided into. Those who are interested in funding reserve their contributions, however, in most cases they pay nothing until the project has been fully funded.  Only then, they will need to pay the agreed amount by bank transfer, credit card or PayPal.

Crowdfunding platforms and models

Crowdfunding platforms are websites that bring together those who promote projects and request funding and users who offer monetary contributions. Crowdfunding platforms can be defined as follows:

  • Generalist platforms that collect projects in all areas of interest.
  • Vertical (or thematic) platforms specialised in projects in specific sectors.

Platforms are also divided according to the type of crowdfunding model as follows:

  • Donation-based: platforms where users can make donations to support a specific cause or initiative without receiving anything in exchange (e.g. funding an election campaign)
  •  Reward-based: users take part in funding a project in exchange for a non-monetary reward or acknowledgement (e.g. funding a theatre performance and receiving a ticket for the show in exchange). It is the most widespread model to date.
  • Social lending or peer-to-peer lending: used for loans between private individuals, who are rewarded by the payment of interest.
  • Royalty-based: funding an initiative and being repaid with the profits made.

Equity-based: when investing online, users acquire a real share in a company: in this case, the “reward” for funding is represented by the overall equity and administrative rights that arise from a share in the enterprise

Crowdfunding in Italy: the first and only country with ad hoc regulations

Italy is the first country in Europe to have a law that regulates equity-based crowdfunding. Unlike in other countries, crowdfunding portals in Italy are equivalent to existing applications (public savings and payment services).

This difference arises in response to the economic crisis that struck Italy in 2008, a crisis that particularly affected small and medium-sized companies and new enterprises, better known as start-ups. Regulations applying to a specific type of innovative start-up were introduced with Legislative Decree no. 179/2012 (converted into law no. 221 on 17 December 2012) entitled “Further urgent measures for Italy’s economic growth” (commonly known as the “Decreto Crescita”).

The name “Decreto Crescita (Growth Decree)” has been used to stimulate the economic growth of Italy.

In the overall bill, equity-based crowdfunding is seen as a tool that can facilitate the development of innovative start-ups through regulations and funding procedures that exploit the potential of the Web and therefore stimulate the economic growth of Italy.

The decree has delegated Consob (the Securities and Exchange Commission) with the task of regulating some specific aspects of crowdfunding aimed at creating a reliable “environment” to generate confidence among investors. Consob adopted the new regulations on 26 June 2013.