The Problems With Crowdfunding

By Mary Gotschall;

Crowdfunding — or soliciting people online to fund projects — is rapidly growing in popularity around the world, say experts.

Here’s how crowdfunding works: You pitch your project to a large group of people through an online platform. If they are interested in your project, they donate money to fund your project.

You pay a fee to the crowdfunding platform for hosting your appeal. For example, a popular site called Indiegogo charges a four percent fee from the total you raise. It also charges $3 for credit card processing, plus a $25 wire fee for non-U.S. campaigns.

One of the largest crowdfunding sites is Kickstarter. Kickstarter is a funding platform for creative projects. Since it launched in 2009, “over $2 billion has been pledged by more than nine million people, funding more than 90,000 creative projects,” says Kickstarter’s website.

Many artists, designers and filmmakers have funded their projects through the platform. Most projects raise between $1,000 and $9,999, although some have raised millions of dollars, reported Kickstarter.

Crowdfunding platforms cater to different audiences. Startups seeking funding from investors can turn to Angel List,Crowdfunder, or Fundable, reported Business News Daily.

Other crowdfunding sites focus on charities and non-profit organizations.

Despite its benefits, crowdfunding poses legal, regulatory and ethical challenges, say experts. Crowdfunders who raise money incorrectly “could run into problems with securities law,” wrote researchers Stephen Wolfson and Matthew Lease at the University of Texas.

The U.S. Securities and Exchange Commission (SEC) regulates the sale of stocks and bonds. The SEC is charged with protecting investors from scams. The agency has proposed rules that would affect crowdsourcing sites where a company is selling stock or equity, wrote Kendall Americo, a crowdfunding attorney.

Crowdfunding only refers to raising funds on the Internet. Crowdsourcing is a broader term. It means using the Internet to raise funds, solve problems or generate innovative ideas from other people.

Crowdsourcing has other perils

Crowdsourcing can cause innovators to lose control of their work and not be fairly paid for it, warned experts.

“Crowdsourcing can be an innovative way to source and/or develop creative works,” wrote researchers Wolfson and Lease at the University of Texas in a paper called “Look Before You Leap: Legal Pitfalls of Crowdsourcing.”

Yet the creators of these works “can easily lose control over crowd-developed creative works” if they do not pay attention to copyright laws.

Ross Dawson, author of “Getting Results from Crowds,” said crowdsourcing could exploit people by profiting from their ideas and not paying them.

Design Contest, a website for designers, warned design professionals to “avoid being scammed out of money, time or effort” on crowdsourcing sites. They urged designers to find out who gets the rights to their work and how they will be paid.

Despite these perils, crowdsourcing continues to grow at a rapid pace globally.

Sean Moffitt is managing director of Wikibrands. At a conference in Singapore, he said that the crowdsourcing market is growing 80 percent every year. (Reference)

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