Crowdfunding is changing the fundraising paradigm
Author: Loreta Isac, Center for Not-for-Profit Law (Romania)
Published on: 2022/02/28
Crowdfunding is an instrument by which capital can be raised, through a collective effort from friends, family, various investors and both existing and future customers.
The crowdfunding platforms are relatively new in Romania compared to other European countries. In direct translation, crowdfunding would mean funding from the public, namely supporting a business idea online, with contributors to that platform or the general public as a target group. Therefore, crowdfunding (which in the West also bears the name kickstarter) will be able to call on a group of people or investors to receive the capital injection that an entrepreneur needs to launch or to develop a business. Thus, thanks to the money received from the participants (who are also called supporters or business angels), the business idea can become a reality.
The benefits of crowdfunding are not just about raising money. Crowdfunding campaigns are also unique in their ability to attract the interest of the general public and to stimulate engagement. Because we need to engage the crowd to be successful, campaigns provide an incredible platform to raise awareness for a company, a product, a service, a brand. The purpose of the campaign and the timeline create a sense of urgency that motivates investors. Thus, crowdfunding offers startups the opportunity to create popularity and secure early adopters.
The Benefits of Crowdfunding are also:
Validation of Concept – Presenting the concept or business to the general public offers an excellent opportunity to validate and refine your offer. As potential investors begin to express interest and ask questions, you will quickly see if something is missing that would make them more likely to buy or get involved.
PR & Marketing – From launch to closing, you can distribute and promote your campaign through social media, newsletters, email, and other online marketing methods. As you and other media outlets cover the progress of fundraising, you can double the traffic to your website and other corporate resources.
In Romania, we have the three mentioned funding models that have detached from the European ones and are used and adapted to the legislation in force by most existing crowdfunding platforms.
They are common for social cases promoted either by a non-governmental organisation or by another entity. In this case, the person who has a financial contribution becomes a tax donor and is subject to the law on donations and can also benefit from moral recognition from the beneficiary. On crowdfunding platforms, a maximum amount required for the case is generally set, and whether it is reached or not, the amount collected in the account associated with the case goes to the person who requested it on the platform. In Romania, fundraising campaigns through donations have entered crowdfunding platforms because of the visibility and credibility they gain from promotion on such a platform.
● Advance payments
They are used in the case of business ideas/ initiatives which result in a business that can invoice services or goods. In this case, the person who makes the financial contribution through a crowdfunding platform will buy in advance, at a reduced price or not, packages of services or goods from the person who initiates the business idea. Because most businesses at that time are not active from the point of view of profit or accounting, these invoices are entered in the book entry separately from regular invoices.
Examples of platforms with advance payment system in Romania: CONSOLID8
● Equity crowdfunding
It involves the disposal of a part of the company in the form of shares to those who fund the business idea. Unlike the other two methods, this allows contributors to become part of the company by placing capital for a package of shares. As equity owners, taxpayers receive a financial return on their investment and ultimately receive a portion of the part in the form of dividends.
Examples of platforms for funding with shares in Romania: SeedBlink
In Romania, a very small number of crowdfunding platforms are currently active. The services they offer are similar from one platform to another, including: easy access to communities of potential investors, validation of the business idea or giving credibility to the sustained cause, promotion of the cause/ business idea, constructive feedback from potential investors, media exposure, consultancy on completing legal steps regarding the investment.
Currently, there is no dedicated legal framework in Romania to regulate crowdfunding activities. Despite this legislative vacuum, local companies have shown interest in developing such activities. The EU crowdfunding regulation, which will become directly applicable in all EU Member States from 10 November 2021, aims to create, together with the MiFID II Amending Directive (2), a harmonized regime for crowdfunding based on investment and investment loans.
We can conclude that crowdfunding is changing the fundraising paradigm in Romania and social entrepreneurs are increasingly benefiting from it. Also, social impact measurement has become essential for both philanthropists and organizations, who need to convince external investors and achieve a higher internal efficiency.