Originally aimed at attracting small financial contributions without any intermediaries, crowdfunding was, until recently, predominantly the domain of filmmakers and musicians seeking resources for their artistic projects. Yet, with the increasing popularity of crowdfunding portals for start-ups, such as Angel List and CircleUp, can this new medium become the next big thing in funding business expansion?

According to a World Bank report published in 2013, though crowdfunding is still a relatively new phenomenon in developed countries, it holds much promise for the developing world, where funding for new initiatives, although increasing in availability, remains scarce. As an example, the World Bank quotes Homestrings, a London-registered crowdfunding platform for infrastructure projects that has mobilised about $25m in funds used 13 African countries.

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In Israel, 4000 accredited backers from 23 countries used OurCrowd, a start-up funding platform launched in 2013, to raise more than $35m for 33 separate companies. Crowdcube, a London-based crowdfunding service, helped raise more than $46m for 126 businesses, according to the platform's founders. Following that success, Crowdcube recently launched its bureau in Barcelona, looking for more investors outside of its main market in the UK.

A game changer

In the US in 2012, president Barack Obama signed the JOBS Act, sending a message that crowdfunding could change the game for small, private businesses seeking funding. The US Securities and Exchange Commission (SEC) voted unanimously in 2013 to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding. The proposed rules can only be applied to certain platforms operated by a registered broker of a funding portal, and the final rules are waiting to be ratified as the SEC reviews its feedback.

Traditional crowdfunding platforms that focus on music and movies often lure backers with the opportunity to meet authors, access new materials before others and be included in closing credits. Websites such as Crowdcube and OurCrowd, however, offer investors small equity for their backing.

Though attractive to a growing number of investors, crowdfunding has its flaws, according to Mark Elenowitz, CEO of TriPoint Global Equities, an international investment bank. “Without having an investment bank that does proper due diligence and analysis, and makes sure that what has been represented is true, investors are putting themselves at risk,” says Mr Elenowitz. 

In the case of foreign investors, says Mr Elenowitz, it is even more risky, as they usually have little opportunity to verify viability of the project in which they are investing, as they typically make investments over the internet. To remedy this issue, Mr Elenowitz's firm has launched BANQ, an online investment banking platform that provides accredited investors access to proven private equity. BANQ's services, like the rest of equity crowdfunding, are part of a new and untested realm of investment that offers exciting and innovative tools that economic developers are having to pay increasing levels of attention to.