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Author Topic: Crowdfunding is an investment not a sale or purchase  (Read 6876 times)

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Offline kat

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Crowdfunding is an investment not a sale or purchase
« on: February 09, 2012, 07:53:39 PM »
What is crowd funding
Essentially crowd-funding is a means for individuals, businesses etc. to source unsecured financing, typically for a specific project, venture or investment opportunity. There are generally no minimum or maximum limits to the amount of money an individual is able to invest, and where they are, it's largely at the discretion of the project(s) author(s) rather than the crowdfunding service provider. Generally speaking there are three main types of Crowdfunding (although there are numerous variations or combinations therein):

 1) Reward based: 'investor' has no express expectation of a return with a monetary gain (analogous to a 'donation').
 2) Loan Based: 'investor' expects a return of the principle invested at a minimum (analogous to a 'loan' repayment +interest)
 3) Equity based: 'investor' expects a return on investment and 'share' in opportunity (analogous to 'loan' +share +dividend)

Each type has it's own specific peculiarities and associated obligations with respect to any legislation governing financial investments that are required by law to be explicitly stated in the service providers Terms or Service; in other words the relationship and obligations between the Service Provider, Investor and Investee will be made explicitly clear, along with any provisions of indemnity or remedy should projects fail. Read them.

Refunds
Due to the inherent nature of crowdfunding it's highly unlikely that once an Investor has funded a project that, should it fail, they will receive any part, if at all, of their invested sum. Because nothing is actually purchased or exchanged (in terms of a 'bill of sale'), normal consumer protections do not apply. And as the Investor is expected to have been fully cognizant of the risks involved before entering upon agreement, it is generally incumbent upon them to ensure such risk are minimised. So again, due-diligence is in order.
IMPORTANT: Crowdfunding services are Investment services therefore the prospective Investor should ensure the same level of due-diligence is applied as would be expected when investigating other opportunities before then only providing as much capitol as they can afford to loose.
Consumer Protections
It's important to understand that Crowdfunding service are not banks, they don't hold or manage money in the same way (although this does depending on the particular type of service offered). What they more typically do is gather 'pledges' or 'conditional agreements to pay' (when a person sends $10 they're actually making a 'promise' or 'agreement' if "X" condition is true); if a proposal fails pledges are simply cancelled (and no money transferred); if it succeeds, the Crowdfunding service acts as an administrative intermediary of transfer between investor and project author (minus fee charged) - pledges/agreements to pay are actioned and money is transferred. The only money they ever touch is the fee they charge. If they were to actually hold money in lieu of transfer they'd essentially be a wire-transfer service in similar vein to PayPal (which isn't a bank, and does hold funds) and held to a whole host of federal laws governing securities and exchange they are current not obligated to. In terms of protecting the consumer this situation complicates matters precisely because they don't hold funds, this means they cannot be held liable for any losses (they don't have any cash so there is nothing to loose), and why the onus is then firmly in the hands of project authors once funds have been transferred between investor and project author (which is why remedy can only be sought through the project author).

Additional Reading
Crowdfunding: is your investment protected? (FSA obs. cf. FCA.org.uk below)
http://www.fca.org.uk/news/ps14-04-crowdfunding
http://www.ukcfa.org.uk/
http://www.fca.org.uk/your-fca/documents/policy-statements/ps14-04
http://www.out-law.com/en/articles/2014/march/uk-regulatory-regime-for-crowdfunding-platforms-finalised/
http://www.osborneclarke.com/connected-insights/publications/regulation-crowdfunding-uk/
http://www.weblaw.co.uk/ebooks/crowdfunding-guide.pdf
https://www.city.ac.uk/__data/assets/pdf_file/0009/133965/Crowdfunding.pdf
For US specifically
http://www.sec.gov/rules/proposed/2013/33-9470.pdf
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677#.VOMT_C4mtmM
http://www.lawschool.cornell.edu/research/ilj/upload/weinstein-final.pdf
http://ced.sog.unc.edu/crowdfunding-for-development-a-primer-on-federal-and-north-carolina-securities-law/

above posted 17 Feb 2014

below originally posted 17 Feb 2012

Crowd-funding is illegal!?
Was just reading an article in Develop about UKIE wanting to change how UK law and legislation views crowd-funding. In short, it's surprisingly considered an illegal or at best, 'unregulated', activity in the UK. Interestingly most Governments (US, UK, et-al) consider this type of funding mechanism to be an 'investment' and not necessarily a 'donation' or 'purchase' (pre-order). This means crowd-funding tends to fall under the auspices of various regulatory bodies, the Financial Services Authority in the U.K, or the Securities and Exchange Commission in the U.S for example, who lay out the regulations and policies that are supposed to protect (*cough*) consumers/end-parties when making investments of any type. Crowd-funding generally presents a problem in the way 'products' or 'services' are sold to the public - the project originators intent has to be clear and there has to be some way to protect or recourse channel available should things go belly-up. The Terms & Conditions under which many crowd-funding website provide services don't appear to be enough at present.

Further Reading Resources
UKIE Report


Offline ratty redemption

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Re: Crowd-funding is illegal!?
« Reply #1 on: February 09, 2012, 08:30:59 PM »
i haven't visited the links you posted but to sum up, is this considered illegal because our governments can't tax it?

Offline kat

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Re: Crowd-funding is illegal!?
« Reply #2 on: February 09, 2012, 08:43:45 PM »
Well... the consensus seems to be about protecting investors (same kind of protections as are afforded to those investing in shares or similar types of financial services). The 'tax' thing would (should?) generally be a matter for the people/companies/businesses on the receiving end, usually as part of their income/outgoings etc.

Offline ratty redemption

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Re: Crowd-funding is illegal!?
« Reply #3 on: February 09, 2012, 10:20:06 PM »
i think i understand, thanks kat.

Offline kat

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Re: Crowd-funding is illegal!?
« Reply #4 on: February 17, 2012, 11:33:38 AM »
UKIE released the report they were working on regarding changes to crowd funding and UK legislation/law. Not read it yet but it can be downloaded from the aforementioned link (PDF).

Offline kat

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Re: Crowd-funding is illegal!?
« Reply #5 on: February 17, 2015, 08:38:14 AM »
Crowdfunding is in the news again (due to the pretty poor RockPaperShotgun interview of Peter Molyneux) so the original post has been updated with some new(ish) information.

 

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