Crowdfunding is a way of raising finance for businesses by asking a large number of people each for a small amount of money. Through crowdfunding, you can use the internet to talk to thousands – if not millions – of potential funders.
Crowdfunding can provide the opportunity for a business to get market validation for their product or service, support the business by allowing for pre-sales ensuring that some money is in the business before huge expenditure is required and allows for capital investment which can ensure a company continues to trade or grows.
Crowdfunding is a quickly evolving industry with new crowdfunding platforms being launched all the time. The most popular types of crowdfunding are; Equity, Reward, Debt-based and Charitable Donor.
Equity: This is a type of crowdfunding where investors put money into the organisation in exchange they receive ownership of a small amount of the business. As the business succeeds the share value is likely to increase and when they sell their share get a greater amount of money than they invested.
Reward: Investors receive a ‘reward’ for investing money in the organisation. This can be in the form of a free gift such as a t-shirt or e-book, a discounted price on a product yet to be launched or
Debt-based: Investors buy long-term bonds in an organisation in exchange for favourable interest rates on repayments. These are often 3 to 5 year agreements
Charitable Donor: A donation to a community project, charity or not-for profit organisation.
Any product or service could be suitable for crowdfunding but it is essential have an engagement from a good network of supporters; the most successful campaigns tend to be products and services that are B2C products rather than B2B, the company or team have a proven track record in the field or industry that they are selling the product in and the product or service is genuinely innovative and would bring real added value to the marketplace.
There is an ever-increasing number of crowdfunding platforms available to you to launch your crowdfunding campaign on each having their own audience and types of funder. The most popular sites include; Kickstarter, Indiegogo, Seedrs, Justgiving, Crowdcube – it is worth researching the audience on each of these before deciding on the most appropriate platform for your pitch.
We are not trained accountants or tax professionals so it is always worth seeking professional advice before undertaking any significant crowdfunding campaigns but below is our understanding of the tax implications
Equity: Equity investors usually hold some sort of shares in a company. These shares will often qualify for tax relief under the Enterprise Investment Scheme (EIS) (link this to: https://gov.uk/government/publications/the-enterprise-investment-scheme-introduction), or the Seed Enterprise Investment Scheme (SEIS) linked this to: https://gov.uk/guidance/seed-enterprise-investment-scheme-background).
Reward: Reward crowdfunding is considered as a sales transaction between two parties and therefore both parties are subject to income tax or corporation tax if they exceed taxable thresholds.
Debt-based crowdfunding: The tax implications of this sort of crowdfunding follow that of any other form of debt. The lender is taxed on the receipt of interest and the borrower, assuming it is a business, normally receives a tax deduction for the interest payable
Charitable Donor: Donations are made by people who invest because they believe in the cause. In return, rewards may be offered, such as acknowledgement in a rock band’s album cover, tickets to an event, regular news updates, free gifts and so on. A donation will generally not be tax deductible for the donor.
The cost of a crowdfunding campaign is bespoke to each client and can vary depending in the in-house skills of the team, what support is required and the timeline involved. Here at Brandrefinery we are a paid services marketing agency and therefore all our fees are detailed at the start of the process and paid at stages throughout the process regardless of success of the project.
Investing in crowdfunding is suitable to for anyone that has an interest in the product or service that is available. Many crowdfunding campaign have a low entry level cost and incrementally increase to significant investments. What is important for crowdfunding campaign managers to understand is that it is clear what people receive for their investment, any additional fees that they may incur, if there are any significant risks involved and possible returns.
You don’t receive any money from crowdfunding campaigns until your initial target amount is met. If you do not reach the target then all money is returned to the investors. It is therefore better to have a lower target in order to receive payment.
These are what you would spend your money if you exceeded your target – additional services or products that you would develop if you had additional funds.
We would recommend that to have a successful campaign it is important to have at least 12 weeks of preparation time before launch in order to fully take advantage of the possible opportunities.
Your money is always at risk and if you make an investment and the company goes into liquidation, you risk losing some or all of your investment. You will be treated like other investors of the same class by the liquidators, who will divide up any remaining assets in the business in proportion to shareholdings.
There are a number of reasons why a crowdfunding campaign might not be successful these include;
Choosing the wrong platform: The audience of each crowdfunding platform is different and there are platforms that specialise in certain aspects of crowdfunding, you should fully research each one and ensure that the audience is appropriate for your product or service.