There are four main identified types of crowdfunding:
- Donation – money is pledged for no specific tangible return. It is used for Charitable causes, where funds are raised for social and environmental purposes. Donors come together to create an online community. The aim is to get around a common cause to help fund services and programs to combat social and environmental issues;
- Equity – where a percentage of a community enterprise or business is sold as small parcels of non-tradable shares. They are sold in return for pledges of money. The creator must produce the product for which they are raising capital. They must also create equity through the incorporation of a company. Equity crowdfunding, unlike donation and rewards-based crowdfunding, involves the offer of securities. These include the potential for a return on investment;
- Reward – where a reward, typically a product or service, is offered in return for a pledge of money towards a project. The funding does not rely on location of the creators of the projects and the funders / investors. Furthermore, funding increases as a project nears its goal. In reward-based crowdfunding, funders are often too hopeful about project returns. Often they must revise expectations when returns are not met; and
- Lending (Peer 2 Peer) – where a loan comprising of a collection of individual pledges is made available to a borrower in return for repayment of the loan with interest. In Peer 2 Peer crowdfunding, borrowers apply online for free. Following this, their application is reviewed and verified by an automated system. This system determines the borrower’s credit risk and interest rate. Investors buy securities in a fund which makes the loans to individual borrowers or bundles of borrowers. Investors make money from interest on the unsecured loans; the system operators make money by taking a percentage of the loan and a loan servicing fee.
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