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Knowledge Base

Q:
What is crowdfunding?
A:

Crowdfunding is a way to raise funds for a specific cause or project by asking a large number of people to donate money, usually in small amounts, and usually during a relatively short period of time, such as a few months. Crowdfunding is done online, often with social networks, which make easy for supporters to share a cause or project cause with their social networks.

Organizations, businesses, and individuals alike can use crowdfunding for any type of project, for example: charitable cause; creative project; business startup; school tuition; or personal expenses.

There are 2 main models or types of crowdfunding:

  • Donation-based funding, where donors contribute to a total amount for a new project. Often promised return is the product or service that will be developed with the revenue brought in by the crowdfunding campaign. For charitable projects whose ultimate beneficiary is not the donor, there may be some other perk or reward for funders.
  • Investment crowdfunding, where businesses seeking capital sell ownership stakes online in the form of equity or debt. In this model, individuals who fund become owners or shareholders and have a potential for financial return, unlike in the donation model. This became possible when Title II of the JOBS Act went into effect in September 2013 for accredited investors. Nonprofits generally cannot utilize equity markets.

Some of the best-known crowdfunding sites are GoFundMeKivaKickstarterIndiegogo, and RocketHub, but hundreds, if not thousands, of sites exist. Most sites have these characteristics:

  • Let you set up a page to describe, promote, and post updates about your project, especially with video
  • Accept online donations
  • Are easily and highly shareable on social networks
  • Specify the kinds of projects or campaigns that can be on the site (e.g., creative/artistic; entrepreneurial; personal needs)
  • Charge a percentage of funds raised plus fee per transaction

Some sites have an “all-or-nothing” policy, meaning you have to reach your monetary goal to get any of the funds. Thus, if you use a crowdfunding site, read and understand its FAQs (frequently asked questions), guidelines, terms, and conditions before signing up.

Also keep in mind that less than half of all crowdfunding campaigns reach their goals. Take time to learn what makes crowdfunding campaigns for your type of project successful, starting with the staff-selected web sites below. With so many campaigns and platforms on the Internet, the biggest challenges are to reach enough people, and to present a trustworthy, compelling story that will move them to give, then share it with their friends.

Specifically for nonprofits or charitable projects:

In contrast to foundation funding, which almost exclusively flows to 501(c)(3) incorporated nonprofit organizations, many crowdfunding sites allow for a very broad range of projects to participate. Thus, crowdfunding may be a particularly relevant option for a startup organization, or even for unincorporated nonprofit projects or those that have not received IRS recognition of their 501(c)(3) tax exemption.

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