REUTERS: Crowd-funding websites helped companies and individuals worldwide raise US$2.7 billion from members of the public in 2012, an 81% increase on the previous year, data showed on Monday.
As banks rein in lending due to tougher capital rules and greater regulatory scrutiny, crowd-funding, which originated in the United States as a way to raise money for creative projects, has expanded rapidly as an alternative source of finance.
Many websites now offer small investors the opportunity to earn interest from lending money either to individuals or small businesses, while others allow people to invest as little as 10 pounds (US$15) in companies in return for an equity stake.
Interest in crowd-funding exploded after President Barack Obama signed the ‘Jumpstart our Business Startups’, or JOBS, act a year ago to legalise equity crowd-funding, subject to new rules being agreed by regulators.
The market is growing, though it still pales in comparison to bank lending to small-and-medium-sized firms, which in the UK alone stood at 28.7 billion pounds (US$43.4 billion) in the first nine months of 2012 according to Bank of England data.
Worldwide crowd-funding volumes reached US$2.66 billion in 2012, up from US$1.47 billion the previous year, according to a survey by Massolution, a research and advisory firm specialising in the sector. That followed growth of 64% in 2011.
Massolution predicted US$5.1 billion would be raised via crowd-funding platforms in 2013, with a greater shift towards funding new businesses and small firms rather than social projects, which are currently the most popular category.
North America accounts for the bulk of activity, with US$1.6 billion raised there last year, a 105% increase on 2011.
One of the most highly publicised crowd-funded deals last year saw smartwatch maker Pebble Technology raise more than US$10 million through U.S. site Kickstarter, 100 times its target.
Sites seeking donations for charity or funding for creative projects in return for non-financial rewards such as merchandise, access to computer games, or autographed albums raised a total of US$1.4 billion, Massolution said.
Funds raised by lending sites increased 111% to US$1.2 billion, while equity crowd-funding, the growth of which has been limited by regulation governing selling shares to the public, was the smallest chunk, providing US$116 million.
As crowd-funding is relatively new, there is no data yet on failure rates or average returns on equity investments.
“It can be difficult to make returns investing in early stage businesses, but crowd-funding adds flexibility as it opens companies up to a broader base of investors who may not be investing solely for a return,” said Liam Collins, policy advisor at Nesta, a charity which promotes innovation.
Offering investors “rewards” on top of equity stakes can ease the pressure on companies to deliver returns, Collins added. Generous tax breaks in Britain for investing in seed stage firms also make equity crowd-funding an attractive option.
There is no Europe-wide regulation in place specific to crowd-funding websites and the United States is in the process of drafting rules that would govern the sector.
Massolution estimates there are 813 crowd-funding platforms worldwide, either already active or planning to launch.
Wall Street’s industry-funded watchdog, the Financial Industry Regulatory Authority, is working with the Securities and Exchange Commission (SEC) to draft crowd-funding rules and has asked websites to voluntarily register with it as a first step.
The SEC needs to adopt rules before small businesses can sell securities to investors through crowd-funding. “Equity crowd-funding has tons of potential but how regulators interpret it will be a big issue,” said Collins. “You will see a step change in the growth once regulation is introduced in the United States.”
Britain is also looking at how best to regulate the sector. Two equity crowd-funding sites, Crowdcube and Seedrs, have already been approved by the financial regulator, while lending sites will be regulated from April next year.