Crowd Funding: Market Scenario, Investment and Credit Risk Profile, Platform Operators Approach, Recommendations

This report provides an overview of the crowd funding market in the UK, US, and Ireland, including market scenario, investment and credit risk profile, platform operators approach, and recommendations for investors.

Running Head: Crowd funding
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Crowd Funding
Report
Student Name
2/14/2019

Crowd Funding 1
Table of Contents
Introduction.................................................................................................................................................2
Market scenario..........................................................................................................................................2
Investment and Credit Risk profile..........................................................................................................3
Platform operators approach..................................................................................................................3
Recommendations.......................................................................................................................................4
References...................................................................................................................................................5

Crowd Funding 2
Introduction
Crowd funding is a method of acquiring money in smaller amount from large group of people through
online source whether from family, friends and individual investors to fund the projects initiated by the
people or organizations [1]. There are various types of options available in crowd funding depend on the
product and services offer by the business and future growth plans of the business. The three primary
types are donation, reward and equity crowd funding.
When an investor contributing to business in exchange of some reward by the company it can be there
product or services they are offering is called reward based crowd funding and when an investor
become a part owner of the company by trading capital for equity shares and receive a share of the
profits in the form of dividend is termed as equity crowd funding [2].
In India, crowd funding is still in its nascent stage even though the potential is incredibly high. This
report focuses on the evolving crowd funding market in Ireland, the U.K and the U.S. and the
opportunities available in markets for future investment.
Market scenario
In United Kingdom, crowd funding industry has been growing spectacularly and seen as the most
disruptive and innovative force within finance. Mainly three parties are involved namely entrepreneur,
website plat former, and crowd or investor as to constitute the business of crowd funding and the role
of plat former is bring both the parties on same platform. Small entrepreneurs with great ideas decided
to put them forth and consumers are responding positively; they had the choice to create and financially
support the companies they believe in.
According to the UK finance report, it can be analyzed that from 2014 to 2015 the finance market grows
by £ 1.46 million and a spontaneous growth of 43.3% to £ 4.58 billion was saw in 2016 which indicates
the strong scenario of the finance market in the UK due to the win-win method of crowd funding. Peer
to peer lending models captured £ 1.23 billion of market share and reward based crowd funding pushed
£ 48 million in investments, a 14 % annual increase in 2016. The funders in the UK finance market also
increases and shown an astounding 130.8 % rise from 1.089.577 individual funders in 2015 to 2.515.665
in 2016 [3].
Financial Conduct authority (FCA) a regulatory body in UK is concerned with the protection of the
investors who do not have knowledge in assessing the insecurity of the investment. The policymakers
also supported the activity of crowd funding through two tax incentive policy: Firstly, the enterprise
investment scheme assist entrepreneur to get finance by giving tax relief to investors. Secondly, the
seed enterprise investment scheme proposes tax relief to those investors who buy shares in new
companies. These policies help in the expansion of UK market of crowd funding and also benefits the
investors by higher return on investment [4].

Crowd Funding 3
According to department of finance, crowd funding is not the considered as legal activity in Ireland.
There are no formal consumer protections available for those who are using platforms to provide funds
to entrepreneurs. Due to unregulated activities, market of Ireland is small which includes three crowd
funding platforms for providing peer to peer lending services to the customers and captured
approximately 0.33% - 0.40% of the finance market [5].
The scope of crowd funding is limited in the Ireland market till all these activities will be regulated, lack
of regulation resultant in inefficiency and uncertainties, as well as reducing the entry into the market of
new platforms.
The United States is widely seen to be a global pioneer in crowd funding, because of its robust
development in startups and demand in consumer loans with total market size of US$34 billion.
Crowd funding has become the one of the most preferred way to raise money for cause, project or
event. Around $25 billion were raised through peer to peer lending, $2.5 billion through equity crowd
funding and $5.5 billion by donation and reward crowd funding [6].
US regulatory focus on the protection of investor by introducing new regime [7]. Securities and
Exchange Commission (SEC) guideline provides a regulatory framework for Title III of the Jumpstart Our
Business Startups (JOBS) Act of 2012 [8].
 For equity crowd funding, created a funding portal which offer securities to public and all portals
need to be registered with the SEC.
 A company can take not more than US$1.07 million through crowd funding platforms within a
12 month period and company should be incorporated in the US [9].
 Investors need to fill a questionnaire, acknowledging the potential risks in investment. They
have right to withdraw from investment for any reason before 48 hours to the deadline written
in the issuers offering materials.
Investment and Credit Risk profile
Crowd funding markets of the UK and the US is growing tremendously but also have high degree of risk.
Credit risk is the risk of investors which is related with the recovery rate in case of failure of project. In
equity crowd funding market risk of default in these markets is estimated to 50% and in case of peer to
peer lending the risk of investment failure is 30%.
Platform operators approach
According to the statistics from Fundly the largest fundraising platform, growth of crowd funding
industry in USA is projected to over $300 billion by 2025. Currently 191 platforms for raising money are
available in the market and shows 50% global average success rate for crowd funding campaigns.
In the UK, the largest crowd funding platform is crowd funder to connect projects with communities and
more attractive borrowers are available with high rate of return [10]. The regulators has adopted a
sympathetic approach to equity crowd funding and acted in several ways, with restricting the kinds of
investors and method of payment open to crowd funding platforms, the sum investors can invest or
investment sought.

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Recommendations
On the basis of above assessment investor should invest in USA and UK market as both of these markets
have ample of opportunities available with higher return on investment. The scope of this markets are
wider and increasing with pace of time, the regulatory authorities in the US and the UK have made
appropriate laws for growth of crowd funding industry and to regulate these platform effectively. The
policy of both the countries focuses on protection of investor which reduces the risk of investment.
Investor should enter in these markets without any restriction, both these market allows even small
investors to participate in crowd funding, because of risk in investment an investor is limited to the
amount he can invest during any 12 month period. The restriction on amount should be dependent on
the net worth and annual income of the investor during the year.

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References
[1] F. P. R. bottiglia, Crowdfunding for SMEs: A European Perspective, London: Macmillan Publishers,
2016.
[2] K. wales, Peer to Peer lending and Equity Crowdfunding: A guide to the new capital markets for job
creators, Investors, and Entrepreneurs, california: Praeger, 2018.
[3] P. Langley, "Crowdfunding in the United kingdom: A Cultural Economy," Economic Geography, vol.
92, no. 3, pp. 301-321, 2016.
[4] D. G. s. K. Saul Estrin, "The evolution and adoption of equity crowdfunding: entreprenuer and
investor entry into a new market," Small Business Economics, vol. 51, no. 2, pp. 425-439, 2018.
[5] M. G. E. P. R. Gary Dushnitsky, "Crowdfunding in Europe: Determinants of platform creation across
countries," California Management Review, vol. 58, no. 2, 2016.
[6] B. L. B. Venkat kuppuswamy, "Crowd funding creative ideas: The Dynamics of Project Backers," The
Economics of CrowdFunding, pp. 151-182, 2018.
[7] D. Ashta, "A critical comparative analysis of emerging and maturing regulatory frameworks:
Crowdfunding in India, USA, UK," Journal of Innovation Economic and management, vol. 56, no. 2,
pp. 113-136, 2018.
[8] R. m. Stanislav Mamonov, "Success factors in Title lll equity crowdfunding in the United States,"
Electronic commerce research and applications, vol. 27, pp. 65-73, 2018.
[9] c. s. bradford, "The Regulation of Crowdfunding in the United States," The economics of
crowdfunding , pp. 185-217, 2018.
[10] M. A. F. Gary Dushnitsky, "Are we missing the platforms for the crowd? Comparing investment
drivers across multiple crowdfunding platforms," Journal of Business Venturing Insights, vol. 10,
2018.