Dubai: Crowdfunding is a generic term for a number of fund-raising models that allow the general public to pool funds and finance endeavours, projects, or businesses. Broadly it can be split into three general categories: rewards/donation, debt, and equity.

* Rewards/donation crowdfunding

This model most associated with crowdfunding and has been brought to prominence by platforms such as Kickstarter and Indiegogo. This model allows people to back projects or ideas in exchange for a product, early access, or just the satisfaction of supporting a cause they believe in.

* Debt crowdfunding

This model typically is in the form of peer-to-peer lending, allows individuals or businesses to take out loans from the crowd, which are paid back with regular interest payments over a fixed period.

* Equity crowdfunding

This model allows investors of nearly all profiles to buy equity (shares) in growth-oriented private businesses. Investors effectively become co-owners of the business and are naturally incentivised to help it succeed.

* Who are the investors?

Investors in crowdfunds could by anyone with some financial resource. The crowd investors could be comprised of friends and family, customers, casual retail investors, angel investors, and institutional firms.

* Complementary financing

Crowd funding is not a substitute for bank funding, angel investors and VC funds. It does serve as an alternative financing option for SMEs that is complementary to angel and venture capital investing.

* Regulations

In the United States, crowdfunding is restricted by regulations on who is allowed to fund a new business and how much they are allowed to contribute. Similar to the restrictions on hedge fund investing, these regulations are supposed to protect unsophisticated or non-wealthy investors from putting too much of their savings at risk. Because so many new businesses fail, their investors face a high risk of losing their principal.

* How crowdfunding works

Crowdfunding has created the opportunity for entrepreneurs to raise hundreds of thousands or millions of dollars from anyone with money to invest. Crowdfunding websites such as Kickstarter and Indiegogo attract thousands of people hoping to invest in the next big thing. In 2015, nearly 80,000 people put up more than $20 million (Dh73.46 million) on Kickstarter for a company that developed a smartwatch alternative to the Apple Watch. Crowdfunding provides a forum to anyone with an idea to pitch it in front of waiting investors. Crowdfunding sites generate revenue from a percentage of the funds raised.

What’s in it for investors?

Many crowdfunding projects are rewards-based; investors may get to participate in the launch of a new product or receive a gift for their investment. For instance, the maker of a new soap made out of bacon fat sent a free bar to each of its investors. New video games are a popular crowdfunding investment for gamers, who are rewarded with advance copies of the game.

Equity-based crowdfunding is growing in popularity because it allows start-up companies to raise money without giving up control to venture capital investors, and it offers investors the opportunity to earn an equity position in the venture. Investments in equity-based crowdfunding ventures are regulated by the Securities and Exchange Commission (SEC).

Information is sourced from Eureeca.com; websites of DIFC, DFSA, SEC and Investopedia)