If you’ve been paying much attention to the investing field and what you are able to do with your money, you’ve probably heard about crowdfunding.  In case you haven’t, and this is your first time encountering the term, here’s the basics: Crowdfunding is funding by a crowd.  Simple, hunh?

Alright, all kidding aside, crowdfunding works by allowing companies, groups and individuals to solicit money and support from people out in the broader world using website postings.  These organizations and people would like to accomplish certain tasks but lack the money to do so, and decide to approach the world at large rather than more traditional funding groups.

On the donation/investment side, you and other would-be donors/investors are able to provide money to support these projects.  In return, you can get some sort of return, ranging from a type of gift to simple satisfaction of helping a goal youapprove.  (And yes, there are some sites and projects that allow you earn money from your donations, more below.)

So what made crowdfunding suddenly so popular recently?  Well, just over a year ago, the JOBS (Jumpstart Our Business Startups; interesting acronym, I know) Act was passed, which, among other things, allowed companies in the USA to offer equity to investors in exchange for crowdfunding money.  It also allows investors who are not accredited (those with a net worth of more than $1 million or earning $200,000+ each year) to make these sorts of investments, greatly increasing the number of possible investors (maybe including you!)

Pros and Cons of Crowdfunding Investing

After all that, you’re probably ready to jump right into crowdfunding, either as an investor or as an entrepreneur using crowdfunding as a means of boosting your available money.  If you are the latter case, and have a plan you’d like to put into action that needs some money for its implementation, you’re in luck.  There are quite a few sites out there that are directed at entrepreneurs anyway and provide advice on taking advantage of crowdfunding.  If you are thinking about using crowdfunding to fund a project, just let me say, good luck to you!

For this article, though, we’re going to focus on the investor side of the equation; this is a PF blog after all, so a potential investment could prove interesting.  As with any type of investment, there are both pros and cons when it comes to putting money into crowdfunding, so let’s dive right in:

Pro – You’re Now Allowed to Gain Equity from Crowdfunding Investments: For many years those seeking crowdfunding money were only to offer token rewards for donations (T-shirts, copies of the video or book being produced, etc.) if anything.  Thanks to the JOBS Act, though, for-profit crowdfunding investments are here.

Con - There Are Frauds Out There: Currently there aren’t any sources for investigating the information provided by the crowdfunding businesses (that’d be one of those issues that is delaying the SEC from giving for-profit crowdfunding its complete approval).  Until these issues are fully resolved, it’s difficult, if not impossible, to guarantee that your crowdfunding money will go to a good source.

Pro – You Have a Chance to Get Into a Huge Investment on the Ground Floor: While you invest via crowdfunding, it’s possible to get equity in a company or project right at its start.  It’s effectively venture capital for smaller scale investors, giving you potential part ownership in a company with huge potential in the future, possibly leading to tremendous profits.

Con - You Can Lose A Lot of Money: Before you go putting the bulk of your money into crowdfunding, it’s worth remembering that even when you are able to invest for profit, it’s not a very safe investment.  Since it is basically venture capital on a smaller scale, there is plenty of change to lose money. Many of the businesses and projects simply won’t succeed, and your money will be gone, even when the SEC prevents (or at least minimizes) fraud.

Pro – You Can Help Fund Some Wonderful Ideas…: There are plenty of great ideas out there, where their sources lack the needed money to put them into play.  By putting money into these sorts of projects, you’ll be a vital part of ensuring that these projects (like these, for those video game fans) come into existence, and possibly even gain money or another reward as a result.

Con – …Or Some Horrible Ones: Not every idea is a good one, crowdfunding included.  There are plenty of ideas that simply shouldn’t be funded, the sort of things that make you think, ‘You know, maybe the inability for this project to get backers is proof that traditional fundraising sources are correct after all.’  That some strange projects get funding can be…disturbing, at times.

My View: As a means of providing support for projects and people you want to encourage (or getting support for your own project), crowdfunding makes a pretty solid method.  When you are expecting more substantial rewards, from the objects offered to possible investment proceeds, you should be more cautious; there’s no guarantee that the fund raiser will get the needed funds, or that they will succeed, or that they are even telling the truth about their goals.  Use caution, and as with individual stock investing, use only money you can afford to lose.

Some Useful Crowdfunding Sites

Alright, you’ve seen some of the pluses and minuses of crowdfunding; if you’re still interested, where should you go to invest?  There are numerous sites (more than 450, in fact) that allow you to put up your funding request.  Here’s a  few to get you started:

1. Kickstarter: This is easily the most famous of all crowdfunding sites.  It is quite popular among artists and other creative types.  It doesn’t permit money or equity in the project in exchange for money, limiting reimbursement to objects or simply pride in your contributions.

2. AngelList: This site is more focused on technical projects, and only recently commited to crowdfunding.  If you are looking more for projects that focus on things like apps and technical equipment, this is the sitefor you.

3. Crowdfunder: A pretty fitting name for a crowdfunding site, it provides an opportunity to fund plenty of businesses, and gain debt, revenue-based securities, or even equity for your investment.  It can also serve as a good starting place, even if you can’t get the attention of Angel Investor or Venture Capitalists at your current level.

Those are far from the only crowdfunding sites; here’s 10 of them (including some I’ve already listed).  A little bit of searching can turn up plenty of sites covering all the types of crowdfunding you could possibly desire.

What do you think about crowdfunding?  What return would you require for your investment?  Would you consider using crowdfunding to fund a goal for you?

Image Source: Morguefile