Crowd funding or crowdfunding (alternately crowd financing, equity crowdfunding, or hyper funding) describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the internet, to support efforts initiated by other people or organizations. Crowd funding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company, movie  or small business or creating free software.
Another aspect of crowd funding is tied into the United States of America JOBS Act which allows for a wider pool of smaller investors with fewer restrictions. The Act was signed into law by President Obama on April 5, 2012. The U.S. Securities and Exchange Commission is going to have approximately 270 days from the enactment date to set forth specific rules and methods to ensure that funding will actually take place.
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), GoFundMe (2010), Rock The Post (2011) and in the UK Sponsume (2010) and PleaseFund.Us (2011)and Peerbackers (2008).
Electric Eel Shock (EES) the Japanese rock band who have toured the world became one of the first bands without previous significant record sales to fully embrace Crowd Funding. 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.
Franny Armstrong was a pioneer of crowdfunding in the production of the eco-movie The Age of Stupid starring Pete Postlethwaite. The film was crowd-funded by a £450,000 budget being raised by selling “shares” to 223 individuals and groups who donated between £500 and £35,000.
Morton Valence are an early example of a relatively obscure band to independently enter into crowd funding without using a third party website such as sellaband. In 2007 Franny Armstrong discussed her project with bandleader Robert “Hacker” Jessett who adapted it to work for the independent music business raising £20 000 to record and promote the concept album Bob & Veronica Ride Again.  
The Professional Contractors Group, a trade association for freelancer workers in the UK, was founded on the internet in 1999 when Andy White put out a call for 2,000 contractors to pledge £50 to raise £100,000 so he could start the organisation. 5 days later 2002 people had pledged the money and so the organisation was born. Today it has over 14,000 members and is a thriving trade association.
Crowd funding’s earliest known citation was by Michael Sullivan in fundavlog on August 12, 2006.
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 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, 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.
Crowd funding philanthropy
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.
Intellectual property exposure
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 to 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 of 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.”
Pros and cons
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.
Against these advantages 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.. In addition, there is substantial research in social psychology that demonstrates that the crowd is not always so wise. 
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.
In February 2011, a group of entrepreneurs banded together and formed ‘The 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 (H.R. 2930) 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. On November 3, 2011 the U.S. House of Representatives passed H.R 2930 with a vote 407-17. H.R.2930 was subsequently introduced on the Senate Floor and referred to the United States Senate Committee on Banking, Housing, and Urban Affairs (the “Banking Committee”) for further consideration.
Meanwhile, members of the Senate had also been drafting similar legislation with an eye towards adding further investor protections in their proposed equity crowdfunding legislation, as evidenced in the language of the bills that Senators proposed. To that end, the Democratizing Access to Capital Act (S.1791) was sponsored by Senator Scott Brown (R-MA) and introduced in the US Senate on November 2, 2011. S.1791 was substantially the same as H.R.2930, though it lowered caps on the both amount of capital a small business could raise and how much an investor could invest, as compared to the House bill. Shortly thereafter, the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure of 2011, or the CROWDFUND Act (S. 1790) was sponsored by Senator Jeff Merkley (D-OR) and introduced in the U.S. Senate on December 8, 2011. Both bills were referred to the Banking Committee.
This committee held hearings on December 1 and 14  to gather information and testimony on the matter of capital formation for small and mid-size businesses. The hearings related to many bills on the issue that had been raised in the House and Senate that fall. Both hearings, through primarily the December 1st hearing, addressed the matter of equity crowdfunding in detail. Concerns at the time focused primarily on providing the right level of investor protections in the bills to discourage fraud and bad actors. Another concern was the role of state securities regulators in the proposed equity crowdfunding market. On the fraud point advocates for crowdfunding highlighted the transparent nature of the Internet and the regulatory affect of the platforms that would be hosting the stock offerings. Further, they noted the importance of a national standard to govern the industry, as opposed to a patchwork of state by state standards.
Debate continued in the Senate and within the Senate Banking Committee for a few months. Congress’ Christmas recess and then other issues arising in the Senate pushed Crowdfunding and small capital formation bills down in the priority list. In February 2012 equity crowdfunding advocates mobilized again to re-energize the movement and push the Senate to act. This got the Senate’s attention and a further hearing was held on March 6, 2012 by the Senate Banking Committee to review crowdfunding and other capital formation measures. Around the same time the House packaged 7 of its earlier small business capital formation bills into a single bill (H.R.3606 or the JOBS Act). This package contained the original language from H.R.2930 regarding equity crowdfunding. H.R.3606 passed the House on March 8, 2012. As H.R.3606 primarily just reiterated bills already passed in the House and under consideration in the Senate, its purpose was to reiterate to the Senate that these bills were important and to force them all the be passed or voted down as one.
In mid-March Senator Merkley’s office released a heavily revised version of its earlier CROWDFUND Act that took parts from S.1791 and S.1970 and issued the bill as S.2190. This bill had been negotiated with Senator Scott Brown’s office and was sponsored with bipartisan support by Senators Merkley, S. Brown, Bennet, and Landrieu. This bill was later added as an amendment to the JOBS Act on March 22, 2012 and the full JOBS Act passed the Senate the same day. The JOBS Act went back to the House for a final vote. President Barack Obama stated in early March that he would sign the JOBS Act as soon as he received it from Congress. On April 5, 2012 he signed the JOBS Act into law.
It may be some time, given the 270 days the SEC has to begin interpreting and administering the new law, before we begin to see the CROWDFUND Act implemented via the Internet. There are several groups competing to become the regulatory authority under the SEC, all doing heavy lobbying in Washington DC.
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- Traga Seu Show, platform for musical projects
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- The micro-price of micropatronage, The Economist, 27th Sept 2010
- Yahoo News On Crowdfunding Yahoo News, 6 April 2012
- Putting your money where your mouse is, The Economist, 2nd Sept 2010
- The Geography of Crowdfunding, NET Institute Working Paper No. 10-08, Oct 2010
- Is There an eBay for Ideas? European Management Review, 2011
- A Guide to Crowd funding Success
- Ex Ante Crowdfunding and the Recording Industry: A Model for the U.S.?
- Huffington Post crowd funding blogs
- Cash-strapped entrepreneurs get creative in BBC News
- Love a Local Business? Buy a Share – Sometimes it takes a village to fund a company.