What is crowd funding?

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Have you heard of the Korean movie, “26 Years”? If you have, then, did you know the fact that this movie used crowd funding when raising money for movie production? Due to its politically-sensitive theme of the movie, this movie had difficulties in attracting large investors with strong cash power. So instead, its film production company tapped a new way of funding which, as a result, successfully attracted more than 1000 investors and raised $338,500 through the Internet. This is one of the typical cases of crowd funding, which is the collective cooperation, attention and trust by people who network and pool their money together, usually via Internet, in order to support efforts initiated by other people or organizations.

crowd fuding

As seen in the case above, this sort of funding mechanism would have been impossible without the Internet, and more specifically, SNS. SNS plays an important role in crowd funding especially when capital seekers make their ongoing project public and explain information regarding their ideas and business to attract capital providers.

Crowd funding Industry Worldwide and JOBS Act

Crowd funding industry is growing rapidly after late 2000s especially around USA and Europe. Last year 2012, 308 crowd funding platforms across the world raised $2.7 billion, an 81 percent increase over the amount raised in 2011. And the growth is expected to reach $5.1 billion, 89 percent increase in 2013.

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One of the crucial reasons to this worldwide explosion in crowd funding industry is Obama signing of the JOBS Act into Law on April 5, 2012. The Jumpstart Our Business Startups Act or JOBS Act is a law intended to encourage funding of United States small businesses by easing various securities regulations. This means that US, which takes up 57 percent of crowd funding volume worldwide, officially approves of crowd funding as one of the financing methods by startup business and that US wants it to expand. For example, companies no longer have to file registration statement for security reasons and will be limited to raising $1 million in any 12-month period. Therefore continuing rise of many crowd funding platforms and projects are predicted this year.

Italy also has a law regarding crowd funding similar to JOBS Act of US called ‘Decreto Crescita’.

Pros and Cons

Crowd funding which takes advantage of the social nature of the crowd, not only allows businesses to raise capital, but also naturally promote their business model, idea or project to public through SNS. Also, Entrepreneurs can pre-check possibility of their business and public response through crowd funding before they start business in earnest. From investors’ perspective, anyone who is interested and has a little capital to spare can participate in financings.  Ultimately, the industry shifts from “rich gets richer” to “smart gets richer.”

However, cons to crowd funding also exist. Crowdfunding is not a solution for every business model and is not considered to be a sustainable source of revenue. It takes a lot of work and is based on having a pre-existing audience or being able to gain one in a short amount of time. Also, investors will wait relatively for a long time to earn good profits so they should be very cautious deciding where to invest.

The FSC is going to introduce crowd funding system for start-ups in upcoming June, expecting this new system to be a new blue ocean.

Hope you enjoyed this post and lets stay tuned for upcoming Korean crowd funding system and its success! Have a great day ! 🙂

By Bora Oh (bora56179@naver.com)

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