I read recently that Aberdeenshire based craft brewer BrewDog has already raised a staggering $1 million in only 3 days following its new crowdfund launch in the USA. This is on the back of closing its recent round of funding in the UK where it raised a world record crowdfund of £19 million. This shows the power of crowdfunding and the ability of a company based outwith the large urban centres to access financing through the power of the Internet.

Given Scotland’s apparent prowess in this area, I thought it might be worth re-visiting the topic of crowdfunding. There are essentially four crowdfunding models:
• Rewards based
• Donation based
• Equity
• Peer2Peer lending

In the rewards based model, the contribution is given in return for a gift with different gifts being offered depending on the amount which is given. Although the projects vary, it’s a common means by which businesses can fund development and sell products prior to launch and is very popular in the creative industries. Platforms supporting this reward based model include Kickstarter and Indiegogo.

With the donation model the person giving the money typically has no expectation of a return on their “investment” and money is given for philanthropic reasons or to support a person or organisation in which the person has a connection. Platforms supporting the donation based include JustGiving.

The equity model is the one used by BrewDog where “the crowd” invest money in the business in return for shares. This type of crowdfunding is the most regulated and the consequences of breaching the law by raising funds in this manner are significant. Platforms supporting equity based crowdfunding must be authorised by the Financial Conduct Authority and include ShareIn (based in Edinburgh) and Seedrs.

Finally, with the Peer2Peer lending crowdfund, the intention is that the investors will receive their money back with interest. It allows for the lending of money to businesses whilst cutting out the banks (who may have refused to finance the business) and reducing the costs of lending. Platforms supporting Peer2Peer lending must also be authorised by the Financial Conduct Authority and include LendingCrowd (based in Edinburgh) and Funding Circle.

However, before we get carried away about the ability to raise funding from the 3.6 billion web users on the planet, it is important to consider that you are competing for their attention in a very crowded marketplace. Experience tells me that crowdfunding is unlikely to be successful for all businesses. Firstly, they tend to work well where you already have an established fanbase or users (i.e. a crowd!) and where there is a tangible product (i.e. beer, CD, film, gadget etc) or where the brand is already well recognised (i.e. BrewDog, ). It is very difficult for new start-ups to generate interest in funding a product or technology (no matter how clever it is) without first generating interest in the wider community.

If you are considering a crowdfunding campaign or have any queries about this topic then please contact Angus McGuire or Alan Stalker on 01383 721621.

Angus McGuire: alm@businesslaw.co.uk

Alan Stalker: ads@businesslaw.co.uk