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Faculty of Economic and Social Sciences & Solvay Business School

The effect of crowdfunding

Academiejaar 2015-2016

Promotor: Prof. dr. Lieven De Moor

Co-promotor: Prof. dr. Hyonsu Kim

Eindwerk voorgelegd voor het behalen van de graad van master in de bedrijfskunde door

Vercammen Joep


1. Introduction 3

2. Methods 4

Crowdsourcing? 4

What is crowdfunding? 4

Why do companies use crowdfunding as an alternative financing source? 5

Basel regulation 5

Different crowdfunding methods 6

1. Non-financial: 6

2. Financial: 6

Advantages and disadvantages 7

Entrepreneur: 7

Investor: 7

Trend in crowdfunding 8

Crowdfunding platforms 10

Quantity of platforms worldwide 2012 10

Crowdfunding history worldwide 11

Crowdfunding in the US 12

Securities Act of 1933 12

Securities Exchange Act of 1934 12

Startup America 12

Jumpstart Our Business Startups (JOBS) Act 13

Title III Crowdfund Act 13

Crowdfunding in the UK 17

Crowdfunding in France 17

Crowdfunding in Belgium 14

Crowdfunding in the developing world 17

References 17

1. Title

2. Abstract

3. Introduction

4. Methods

5. Results

6. Discussion

7. Conclusion

8. References

Results and Discussion can be combined.

1. Introduction

In the introduction part, you can tell the background of this paper, simple literature review, difference of your research, approach used in this paper, and summary of outcome (you can omit this)

2. Methods


Crowdsourcing is a term that many people think is the same as crowdfunding, but nothing more is true.

So what is the difference? “crowdsourcing is a problem-solving approach that taps the knowledge, energy, and creativity of a global, online community” (Parvanta, Roth, & Keller, 2013). You use in both cases the crowd to help out the person, company that needs the aid of people. In crowdsourcing the crowd will help you to develop and/or improve your idea, product in a way of a service. For example, your idea is creating a new intelligent mobile phone, the crowd will help by what specifications it needs, the colors, …

Crowdfunding will realize your project not by services but by a financial contribution.

What is crowdfunding?

Different types of people, for instance individuals, start-ups, others search for possible potential investors on the world wide web for gaining capital for their project or idea. On the internet are several ‘crowdfunding platforms' these are made so the crowd can receive information and can communicate with the fundraiser (Europese unie, 2015).

The potential investors can make small/big contributions afterwards they have read, received information about the campaign (Goins & Little, 2014).

When a project is underfunded it will return your investment this is beneficial for all the investors, only when the minimum project amount is met there is no return (Frydrych, Bock, Kinder, & Koeck, 2014).

In return for an investment it is possible but not necessary to receive a compensation in exchange. This compensation can be non-financial or financial.

Beside that crowdfunding is an alternative financing source an other important reason why to use it, as a marketing tool. Businesses can attract investors who can be potential clients or they can spread the word so new ‘potential' client can be attracted to the the company or the company can gain popularity (Douw&Koren, 2015).

Why do companies use crowdfunding as an alternative financing source?

Artisans and other people who want to invest in their own company to expand it or develop it won't receive a bank loan in 34 percent of the cases (NSZ, 2015).

The regulations became stricter for banks due to the economic recession. These regulations are the principal causes why banks won't give loans very easy to start-ups and SME's (Forton & Van Hout, 2015).

Basel regulation

“"Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to:

• improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source

• improve risk management and governance

• strengthen banks' transparency and disclosures.”

(Bank for international settlements, 2015)

The Basel regulation is the most important regulation which arose due to the recession.

This regulation lead to an increase in alternative financing methods because the expectations are that the price from capital will increase (ABN AMBRO BANK, 2011).

The baseline of Basel III is the following: higher minimum capital requirements, stronger liquidity requirement, higher liquidity buffer so banks can manage to keep their financial obligations in case of uncertain conditions appear (Janssens, 2013).

Different crowdfunding methods

There are four kinds of crowdfunding which are or financial or non-financial.

1. Non-financial:

Reward- and donation based CFPs (Belleflamme, Omrani, & Peitz, 2015).

When a person gives money to a company, project he/she won't receive a money reward in return. What do they receive instead? Not necessary something but it can be for example when you donate money for a singer-songwriter you will receive their new album, goodies, merchandising for free (Europese unie, 2015).

2. Financial:

Belleflamme, Omrani & Peitz say “where funders are investors in a campaign and may obtain monetary benefits. They have to assess the risk of the investment.”

a. Equity-based:

After investing in an equity-based project the company will offer equity stakes. By selling a share of the company, the investor will own a part of the seller's business.

b. Royalty-based:

Investors have to donate money right away, they won't get as the equity-based model a share. What do they get in return? A piece of the future profits, returns. (Danmayr, 2014)

c. Lending-based:

The crowd lend a certain amount of money to the crowdfunding company. Why is this interesting? The investor receives an extra mostly fixed rated plus the total amount in return for lending it (Belleflamme, Omrani, & Peitz, 2015).

Advantages and disadvantages



 The internet makes it possible to reach the whole world in just one click. Selling the potential idea to tap the right crowd. It gives besides financial benefits also brand awareness and boost your company, a hype can be generated due to the crowd that massively read, talk, share information with the world (Belleflamme, Lambert, & Schwienbacher, 2014).

 Crowdfunding offers an alternative way for financing projects, entrepreneurs are able to ask the crowd instead of the banking firms to lend or invest money. But it is possible to combine with financial loans, …

 To adjust and optimise a product/service, entrepreneurs needs to achieve information from the people. Crowdfunding can potential gives feedback from the investors. This gives both parties an advantage, a product or service that valuable and consist their needs and wishes.

(KPMG, 2014)


 The all or nothing method. When the exact target amount isn't reached, the entrepreneur is mandatory to donate all the money back (Macht & Weatherston, 2014).

 Intellectual property is exposed worldwide, the risk of copying your idea by another firm or person is real (Europese unie, 2015).

 To many shareholders can cause a complex organisation structure.



 As an investor, the all or nothing method is a advantage because there is no risk of loosing your investment when the project doesn't hit the minimum budget for starting the project.

 Compared with different investment methods is crowdfunding possible for small and big amounts. These small amounts minimizes the risk for investors.


 Finding a suitable platform is time consuming, there are many platforms worldwide which delays the process of searching the best investment (Macht & Weatherston, 2014).

 Fraud risk elevates in crowdfunding, the investor doesn't have always real information about the project and the honesty of the entrepreneur. Famous crowdfunding websites uses fraud detection programs to eliminate most of the scammers (De Buysere, Gajda, Kleverlaan, & Marom, 2012).

Trend in crowdfunding

Douwen & Koren say “Belgium total amount of crowdfunding incomes was in 2013 only 1.1 million euro. Belgium inhabitants only crowdfund for an average 10 cents per person, the neighboring countries such as Netherlands and France respectively for 1 euro 90 cents and 1 euro 19 cents per inhabitant.”

In 2014 the total amount tripled already from 1.1 million to 4 million euro. This in a big increase but yet only a small piece in comparison with The Netherlands and France.

In the Netherlands the sum is 60 million euro and in France 150 million euro.

There are three main categories for crowdfunding: companies are the largest of them, followed by creative projects and at the bottom charities.

After analyzing the quantity crowdfunding the conclusion is, that the creative projects are the most popular, the lowest are organizations. This means that there are only a few organizations raises an impressive amount. The pie table shows that only 27 companies divide a sum of 2.7 million which means that every company receives an average of 100.000 euro. The creative projects have only an average of 5.800 euro (Douw&Koren, 2015).

“Global crowdfunding experienced accelerated growth in 2014, expanding by 167 percent to reach $16.2 billion raised, up from $6.1 billion in 2013. In 2015, the industry is set to more than double once again, on its way to raising $34.4 billion.”

(, 2015)

Crowdfunding platforms

By attracting the crowd, their is need of the internet and from platforms. Their are three important parties in a platform, first of all the platform, without this platform crowdfunding won't be as easy as it is now cause the platforms connect the entrepreneurs and on the other side the investors. The second party is the entrepreneur, this is a person or company who wants to collect money from the third party, the investors or crowd who wants to invest the entrepreneurs projects (Veuger, 2015). In a normal value chain cost and revenue are each on another side, with crowdfunding these two are mixed, this means that cost and revenue are both on the side of the customers and the suppliers (Eisenmann, Parker, & Alstyne, 2006). Two kinds of platforms are individual crowdfunding platforms and standardized platforms. In the individual platform initiatives, the entrepreneurs are more advantaged because they can shape/specify their exact needs. By shaping it, it's possible to give the crowd a bigger and more vary compensation (Belleflamme, Lambert, & Schwienbacher, 2013). Standardized platforms like the most famous ones (Kickstarter, IndieGoGo,…) are the opposite from the individual ones. The processes are standardized, in this way the entrepreneurs can't shape their process. The crowd can give donations or can give financial support with a compensation in return. Donations happen only in 9% of all the crowdfunding cases. The form with compensation in return appears in 91% of the cases. These compensations can be nonfinancial or financial. Veuger (2015) mentions in his work that crowdfunding platforms become more attractive if the platform has allot of investors. In this way popular platforms stay popular.

Quantity of platforms worldwide 2012

Only the countries that has more than 1 platform:

US: 191

UK: 44

Netherlands: 29

France: 28

Brazil: 21

Germany: 20

Spain: 18

Canada: 17

Australia: 12

Portugal, New Zeeland, Belgium, Italy, India: 6

Switzerland: 5

China 4:

Denmark, Sweden, Ireland, Finland, Japan: 3

Russia, Czech Republic, Argentina, Mexico: 2

(Statista, 2012)

Crowdfunding history worldwide

In 1997 was one of the first successful crowdfunding projects build. A rock band based in Britain reached out to there fans to fund their music tour. Their fans and others funded the tour by raising 60.000 Dollar. This was the main reason to start up a crowdfunding platform in 2000, with the name ArtistShare and so crowdfunding was launched (Fundable, n.d.).

The next stage was Kiva, a platform also known as micro lending or peer2peer lending. This means that a person can lend money outside the traditional bank. Kiva platform which is a non profit organization offers in developing countries very small loans. Due to this loans these people can fight against poverty in these countries (Kiva, n.d.). Because reward based platform, called ArtistShare was a huge success, Kickstarter launched his platform in 2009. In all these years Kickstarter turned to the biggest crowdfunding platform in the world. The platform had already 265.000 campaigns. Nevertheless, only 36% of all the campaigns are funded, cause it only funds a project if it reaches their goal budget. Otherwise Kickstarter will refund the backers (Freedman & Nutting, 2015). In 2011 an important initiative arose, the Startup America Initiative by President Obama. Followed this initiative in 2012, Obama signed the JOBS act into law (Wendling, 2012).

Crowdfunding in the US

Securities Act of 1933

The act from 1933 applies to the the primary market transactions. A company will have to use and implement these act regulations when it sells or offers securities for the first time to the investing public (Securities Act of 1933, n.d.). This act means for crowdfunding that when it offers securities it has to fulfill to these regulations. For the investors means this that their has to be a possibility to receive something in return.

An important difference is that for crowdfunding with donations, the Securities Act won't be used. A Security will only come between when there is a certain compensation in return (Petrus, 2014).

Securities Exchange Act of 1934

Comparing the Act of 1933 and the one of 1934 results mainly that in 1934 the act means that it is for companies that already offers already existing securities. In this way they have to register and fulfill to every regulations of the Exchange act (Securities Exchange Act of 1934, n.d.).

Startup America

The White House in the US launched ‘Startup America' for three main reasons, to celebrate, inspire and to accelerate high growth entrepreneurship in America (, 2014).

“Overall, Startup America, through a full range of public and private initiatives, is aimed at:

• Expanding access to capital for high-growth startups throughout the country;

• Expanding entrepreneurship education and mentorship programs that empower more Americans not just to get a job, but to create jobs;

• Strengthening commercialization of the about $148 billion in annual federally-funded research and development, which can generate innovative startups and entirely new industries;

• Identifying and remove unnecessary barriers to high-growth startups; and

• Expanding collaborations between large companies and startups.”

(, n.d.)

Jumpstart Our Business Startups (JOBS) Act

This act which is launched in 2012 by the United States Congress. The main reason for this was the Financial recession. The recession did damage to the economy and the growth after was to slow to repair America. JOBS act aimes to boost the job growth and the small businesses. Despite this act had some problems in terms of securities for investors. SEC also known as Securities and Exchange Commission is responsible for solving the risks for investors, especially for fraud and manipulation. Many cases have problems with investor protection first of al and further more with crowdfunding abuse (Baritot, 2012).

Title III Crowdfund Act

Crowdfund Act, another name for Capital Raising Online While Seterring Fraud and Unecthical Non-Disclosure Act of 2012 can be find in the JOBS Act more specific in title III.

Title III the legal framework can be retrieved (, 2016).

Crowdfunding exemption

Looking into the JOBS Act section 302(a) their is a significant difference compared with the Securities Act, a new paragraph that consist an exemption to registrate yourself. Companies who respects the strict conditions and wants to set up an equity crowdfunding project, are allowed to use this exemption (Petrus, 2014).

Conditions that can be found in the enactment:

(a) “SECURITIES ACT OF 1933.—Section 4 of the Securities Act of 1933 (15 U.S.C. 77d) is amended by adding at the end the following:

‘‘(6) transactions involving the offer or sale of securities by an issuer (including all entities controlled by or under common control with the issuer), provided that—

‘‘(A) the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12- month period preceding the date of such transaction, is not more than $1,000,000;

‘‘(B) the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12- month period preceding the date of such transaction, does not exceed—

‘‘(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and

‘‘(ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;

‘‘(C) the transaction is conducted through a broker or funding portal that complies with the requirements of section 4A(a); and

‘‘(D) the issuer complies with the requirements of section 4A(b).''.

(U.S. Government, 2012)

Crowdfunding in Belgium

Prospectus law

The law of June 16 in 2006 says that in case of a public offer the issuers have to publicize a prospectus. This law has recently changed into a new law dated April 25 2014. The most important change which is important for crowdfunding is the prospectus exemption.

The public offer from effects doesn't has to publicize a prospectus (FSMA, 2014).

Although if they fulfill the following measures:

- Investors can only subscribe for an amount of 1000 euro or less.

- The counterpart of the offer has to be below 300 000 euro

Every document consists the total counterpart and the total amount which the investor fulfils.

(Astrealaw, 2014)

KPMG (2014) says that most of the time investors are willing to invest more than the allowed 1000 euro for each project. An important fact is that the crowd, the investors potential can lose a higher sum when a project leads to a fail.

Definition of prospectus

“Legally mandated document published by every firm offering its securities to public for purchase. It must comply with strict legal requirements and is filed for approval with the country's securities inspectorate” (Businessdictionary, n.d.)


KPMG study of 2014 shows that the funds raised by crowdfunding jumped from 419.000 euro in 2012 to 1.222.000 euro in 2013. In 2014 the total funds are estimated to boost with 80%. This means that there will be over 2.180.000 euro spent in Belgium.

Except the total amount raised, the total amount of projects also elevated from only 11 successful projects in 2012 to 103 in 2014. The main reason for this growth is the increase in donation and reward crowdfunding type. This method allows the crowd to invest money in a project for only a small amount of money.

A person in Belgium as mentioned in the part ‘trends' only consumes 0,10 cents in 2013 and 0,11 cents in 2014. This is a major problem for Belgium, after examining countries as Netherlands (1,58 euro) we can conclude that the spent per inhabitant is tremendously low.

The two biggest types of project that raise money are non-commercial and commercial. The non-commercial projects have a total of 15% in Belgium. Because they make use of donations the crowd only insist to donate low amounts. The other 85% goes to commercial crowdfunding were equity and lending based crowdfunding dominate.

The average total amount of crowdfunding for each project in 2014 is 21.000 euro and each of the three models raises between 600 000 and 800 000 euro.

Let's take a look to donations and reward based crowdfunding, equity and lending bases crowdfunding in the year 2014.

 Donations based crowdfunding: 33% and an average of 90 euro per person who invests.

 Equity crowdfunding: 29% and an average between 600 and 2000 euro per person who invests.

 Lending based crowdfunding: 38% and an average between 600 and 2000 euro per person who invests.

Due to the prospectus law persons can't invest for a higher amount than 1000 euro. But after looking to the average amount which a person invests you can see that there are budgets above 1000 euro. So how is this possible? Crowdfunding platforms can lower their maximum limit of 300 000 euro to 100 000 and when this happens it is possible to invest for more than 1000 euro.

What about 2015 and 2016?

The press report of KPMG in 2014 consist a calculation for the years 2015 and 2016. It say's “Belgium will grow to 4 170 000 euro in 2015 and grow exponentially to 6 645 000 in 2016. There is a growth but after comparing with other countries nearby, the conclusion is that Belgium won't catch up with the others.

(KPMG, 2014)

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