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|The examples and perspective in this article may not represent a worldwide view of the subject. (March 2012)|
Crowd funding or crowdfunding (alternately crowd financing, equity crowdfunding, social funding or hyper funding) describes the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations. Crowd funding is used in support of a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, startup company funding, movie or free software development, and scientific research.
Crowd funding can also refer to the funding of a company by selling small amounts of equity to many investors. This form of crowd funding has recently received attention from policymakers in the United States with direct mention in the JOBS Act; legislation that allows for a wider pool of small investors with fewer restrictions. The Act was signed into law by President Obama on April 5, 2012. The U.S. Securities and Exchange Commission has been given approximately 270 days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of investors.
In 1997, fans underwrote an entire U.S. tour for the British rock group Marillion, raising $60,000 in donations by means of a fan-based Internet campaign. The idea was conceived and managed by fans without any involvement by the band, although Marillion has since used this method with great success as a way to fund the recording and marketing of its albums Anoraknophobia, Marbles, and Happiness Is the Road.
The United States based company ArtistShare (2000/2001) is documented as being the first crowdfunding website for music followed later by sites such as Sellaband (2006), Indiegogo (2008), Pledge Music (2009), Kickstarter (2009), RocketHub (2009), InvestedIn (2010), GoFundMe (2010), Rock The Post (2011) and in the UK Sponsume (2010) and PleaseFund.Us (2011), Peerbackers (2008), Peoplefund.it (2012) and Fundable (2012).
Electric Eel Shock, a Japanese rock band who have toured the world, became one of the first bands without a previous significant recording deal to fully embrace crowdfunding. In 2004 as an unsigned band they raised £10,000 from 100 fans (the Samurai 100) by offering them guestlist for life. Two years later they became the fastest band to raise a 50,000 budget through SellaBand. They licensed the album internationally including to Universal in their native Japan.
Crowd funding in the film industry was pioneered by french entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc in August 2004, when they launched a public internet donation campaign  to fund their film, Demain la Veille (Waiting for Yesterday). Within 3 weeks, they managed to raise $50,000, allowing them to shoot their film.
Crowd funding's earliest known citation was by Michael Sullivan in fundavlog on August 12, 2006.
In 2012, President Barack Obama signed the JOBS (Jumpstart Our Business Startups) Act; this piece of legislation effectively lifted a previous ban against public solicitation for private companies raising funds. As of August 13, 2012, the Securities Exchange Commission has yet to set rules in place regarding equity crowdfunding campaigns involving unaccredited investors for private companies; however, rules are expected to be set by January 1, 2013. Currently, the JOBS Act allows accredited investors to invest in equity crowdfunding campaigns.
There are questions about the legality of taking money from "investors" without offering any of the security demanded by legitimate investment schemes. Sites such as ArtistShare, Pledgemusic, PleaseFund.Us and Funding4Learning have a failsafe. They hold funds in an escrow account. If the nominated target isn't reached, all funds are returned to contributors. While sites such as Gorackup, Indiegogo, GoFundMe, RocketHub, Fondomat, Rock The Post, Peerbackers and Sponsume allow projects to keep all the funds raised.
Investors are given something for their money - so in a legal sense, they have paid for and received something. The Tunnel is selling frames of film for one dollar each. Pioneer One gives you the theme music or a special edition download.
Micropatronage is a system in which the public directly supports the work of others by making donations through the Internet. In use as early as 2001, the term was popularized in 2005 by blogger Jason Kottke when he quit his day job as a web designer and spent a year blogging full time, living off the voluntary donations of his readership. Micropatronage differs from traditional patronage systems by allowing many "patrons" to donate small amounts, rather than a small number of patrons making larger contributions.
Crowd funding is being experimented with as a funding mechanism for creative work such as blogging and journalism, music, and independent film, for funding a startup company, and even for funding public projects. Community music labels are usually for-profit organizations where "fans assume the traditional financier role of a record label for artists they believe in by funding the recording process".
Since pioneering crowd funding in the film industry Spanner films have published a useful ‘how to’ guide. Innovative new platforms, such as RocketHub, have emerged that combine traditional funding for creative work with branded crowdsourcing - helping artists and entrepreneurs unite with brands "without the need for a middle man."
New peer-to-peer companies such as Prosper Marketplace, P2P Financial, Zopa and Lending Club seek to match lenders directly to borrowers. Crowd lending from non-banks is gaining momentum globally as banks have increased interest rates or pulled back from lending to consumers and small businesses; however, as of early 2012, the non-bank sector of crowd lending is yet to be considered a threat to the big consumer lending businesses of the largest global banks.
A variety of crowd funding platforms has emerged to allow ordinary web users to support specific philanthropic projects without the need for large amounts of money. Global Giving allows individuals to browse through a selection of small projects proposed by nonprofit organizations worldwide, donating funds to projects of their choice. Microcredit crowd funding platforms such as Kiva (organization) and Wokai facilitate crowd funding of loans managed by microcredit organizations in developing countries. The US-based nonprofit Zidisha offers a new twist on these themes, applying a direct person-to-person lending model to microcredit lending for low-income small business owners in developing countries. Zidisha borrowers who pass a background check may post microloan applications directly on the Zidisha website, specifying proposed credit terms and interest rates. Individual web users in the US and Europe can lend as little as one US dollar, and Zidisha's crowd funding platform allows lenders and borrowers to engage in direct dialogue. Repaid principal and interest is returned to the lenders, who may withdraw the cash or use it to fund new loans.
One of the challenges of posting new ideas on crowd funding sites is there may be little or no intellectual property (IP) protection provided by the sites themselves. Once an idea is posted, it can be copied. As Slava Rubin, founder of IndieGoGo said: “We get asked that all the time, ‘How do you protect me from someone stealing my idea?’ We’re not liable for any of that stuff.” Inventor advocates, such as Simon Brown, founder of the UK-based United Innovation Association, counsel that ideas can be protected on crowd funding sites through early filing of patent applications, use of copyright and trademark protection as well as a new form of idea protection supported by the World Intellectual Property Organization called Creative Barcode.
On September 30, 2011, the crowdfunding site Kickstarter filed a request for declaratory judgment against Fan Funded who owns U.S. patent US 7885887 , "Methods and apparatuses for financing and marketing a creative work". Brian Camelio, founder of ArtistShare, is the inventor on the patent. KickStarter says it believes it is under threat of a patent infringement lawsuit. KickStarter has asked that the patent be invalidated, or, at the very least, that the court find that Kickstarter is not liable for infringement.
In February 2012, Fan Funded responded to Kickstarter's complaint notably claiming that patent infringement litigation was never threatened, that "ArtistShare merely approached KickStarter about licensing their platform, including patent rights", and that "rather than responding to ArtistShare's request for a counter-proposal, Kickstarter filed this lawsuit."
Proponents of the crowd funding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd. If it does achieve "traction" in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth promotion.
While this does not usually apply to artists and charitable organizations, a disadvantage for business is the requirement to disclose the idea for which funding is sought in public when it is at a very early stage. This exposes the promoter of the idea to the risk of the idea being copied and developed ahead of them by better-financed competitors.. For crowdfunding of equity stock purchases, there is some research in social psychology that indicates that, like in all investments, people don't always do their due diligence to determine if it's a sound investment before investing, which leads to making investments decisions based on emotion rather than financial logic. 
Crowdfunding draws a crowd, investors and other interested observers who follow the progress, or lack of progress, of a project. Sometimes it proves easier to raise the money for a project than to make the project a success. Managing communications with a large number of possibly disappointed investors and supporters can be a substantial, and potentially diverting, task.
Another significant disadvantage to crowd funding is the possibility of getting ensnared in various securities laws, since soliciting investments from the general public is most often illegal unless the opportunity has been filed with an appropriate securities regulatory authority, such as the Securities and Exchange Commission in the U.S., the Ontario Securities Commission in Ontario, Canada, the Autorité des marchés financiers in France and Quebec, Canada, or the Financial Services Authority in the U.K. These regulators can have different ways of determining what is and what is not a security but a general rule one can rely on (at least in the U.S.) is the Howey Test. The Howey Test says that a transaction constitutes an investment contract (therefore a security) if there is (1) an exchange of money (2) with an expectation of profits arising (3) from a common enterprise (4) which depends solely on the efforts of a promoter or third party. Clearly, under this standard, any crowd sourcing arrangement in which people are asked to contribute money in exchange for potential profits based on the work of others would be considered a security. As such, the applicable investment contract would have to be registered with a regulatory agency (such as the S.E.C.) unless it qualified for one of several rule-laden exemptions (e.g., Regulation A or Rule 506 of Regulation D of the Securities Act of 1933, or the California Limited Offering Exemption - Rule 1001 (also known as S.E.C. Rule 1001)). The penalties for a securities violation can vary greatly and depend in large part on the amount of profit obtained by the "promoter," the damage done to the investors, and whether a violation is a first time offense. However, a violation may result in both civil and criminal penalties, a return of any profit made and sometimes a lifetime ban from work in the securities industry. According to Section 5 of the Securities Act, it is illegal to sell any security unless such a sale is accompanied or preceded by a prospectus that meets the requirements of the Securities Act.
|This section requires expansion with: equity practices in other countries. (June 2012)|
In February 2011, Jason Best, Sherwood Neiss, and Zak Cassady-Dorion Principals of Crowdfund Capital Advisors banded together and formed Startup Exemption with the goal to lobby Washington, D.C. to update the U.S. Federal Security Laws and make it legal for entrepreneurs to use crowdfunding to raise a limited amount of early-stage equity-based financing. With the assistance of the Small Business and Entrepreneurship Council (SBEC) they partook in two hearings on Capitol Hill. Their framework was the basis for the Entrepreneur Access to Capital Act introduced by Rep. Patrick McHenry (R-NC) on September 14, 2011. It proposed to greatly reduce restrictions on equity crowdfunding of for-profit businesses then present in state and federal securities laws.
The SEC is now drafting regulations to implement the equity and debt crowdfunding provisions of the bill.
A number of US organizations have been founded to provide education and advocacy related to equity based crowdfunding as enabled by the JOBS Act. They include: