What Is Crowdfunding?

Crowdfunding, also written as crowd funding, is the practice of raising capital for a project or venture from a large number of people, each contributing a small amount, through an online platform that handles solicitation, payment, and disclosure. It is a financing application of crowdsourcing: where crowdsourcing distributes labor or judgment across many participants, crowdfunding distributes capital. The mechanism predates the internet in forms such as subscription publishing and community bond drives, but the modern field dates to platforms launched in the late 2000s that made small-value transactions from strangers economically viable.

What distinguishes crowdfunding from conventional finance is the removal of the professional intermediary. A bank loan officer or venture capital partner screens deals, prices risk, and monitors the borrower. A crowdfunding platform instead exposes the proposal to a dispersed pool of funders who screen it collectively, which changes both the information available to each decision maker and the incentives to gather it.

Funding Models

Four models are conventionally distinguished by what the funder receives. Donation crowdfunding returns nothing material and is used for charitable causes and medical expenses. Reward crowdfunding returns a product or perk, often functioning as a preorder that lets a creator gauge demand before committing to manufacturing. Lending crowdfunding, also called peer-to-peer lending or marketplace lending, returns principal plus interest and competes directly with bank credit for consumers and small businesses. Equity crowdfunding returns a security, giving the funder a residual claim on the venture. The NBER analysis of crowdfunding economics by Agrawal, Catalini, and Goldfarb argues that the models differ chiefly in how they handle incentive problems, since an equity stake exposes a dispersed investor base to moral hazard that a reward preorder largely avoids.

Information and Platform Design

The central economic question is whether a crowd of non-professional funders can evaluate a venture as well as a specialist. Crowdfunding lowers search costs for both sides and relaxes the strong geographic concentration of early-stage capital, but it also raises adverse selection risk, because entrepreneurs who cannot obtain conventional funding are disproportionately likely to seek it. Platforms respond with design choices that function as governance: all-or-nothing funding thresholds that refund contributors if a target is missed, staged release of funds against milestones, public disclosure of financial statements, and visible funding dynamics that let later backers infer quality from early ones. That last mechanism cuts both ways, since observed contributions can produce information cascades in which a campaign succeeds or fails on early momentum rather than on merit.

Regulation

Because equity and lending crowdfunding involve securities, they sit inside financial regulation designed for a very different distribution model. In the United States, Title III of the 2012 JOBS Act created an exemption from registration, implemented through the SEC rules known as Regulation Crowdfunding, which took effect in 2016 and caps what an eligible company may raise in a twelve-month period while limiting how much an individual investor may commit based on income and net worth. Comparable regimes exist in the United Kingdom, the European Union, and much of East Asia, with substantial variation in investor caps and platform licensing. Regulatory capacity is a binding constraint in emerging markets: a World Bank study of crowdfunding in developing countries estimated substantial latent demand while identifying securities law, payment infrastructure, and trust institutions as the gating factors.

Applications

Crowdfunding has applications in a range of fields, including:

• Hardware and consumer electronics product launches financed by preorders
• Independent film, games, music, and publishing
• Small business and microenterprise lending outside the banking system
• Clean energy and community renewable installations
• Scientific research funding for projects below conventional grant thresholds
• Real estate development syndication for retail investors
• Disaster relief and charitable giving campaigns