I) Participatory financing or crowdfunding
Crowdfunding or literally “crowdfunding” is a financing system that consists in using social ties and social networks to invest or finance projects without the intermediation of traditional actors.
Crowdfunding appeared in the United States after the 2008 financial crisis, in response to the difficulties encountered by artisans, entrepreneurs and startups in fundraising. Banks were less willing to lend. Entrepreneurs have started to look elsewhere, for other actors, in order to obtain financing for their capital.
Crowdfunding is based on concepts such as “Microfinance” (Morduch in 1999) and “Crowdsourcing” (Poetz and Schreier in 2012). It represents a single category of fundraising, with different vehicles, processes and objectives.
Two main forces have made “Crowdfunding” possible.
The first is the widespread adoption of information and communication technologies (ITC,
Information and Communication Technology) which has provided the infrastructure to reach millions of investors.
The second is that, during the same period, we have witnessed the development of social networks.
These two combined strengths have simplified the connection between investors and potential investments on a large scale.
This mechanism is defined in the “2013 Guide to ACP/AMF Participatory Financing” as a mechanism that raises funds, usually small amounts, from a wide audience to finance a creative or business project.
The operations are performed using specific platforms on the Internet. These Crowdfunding platforms allow the linking of specific project leaders with donors or contributors. Contributions may be accompanied by a remuneration, monetary or not, generally conditional on the success of the supported project.
In the broad sense, participatory financing is one of the alternative financing modalities.
Alternative financing or “shadowbanking” in English defines all financing outside the banking system. The FSB (Financial Stabilisation Council) describes it as “a credit intermediation involving entities and activities (partially or completely) outside the traditional banking system”.
II) crowdfunding models
There are two main categories of crowdfunding.
They consist in raising capital that is not part of the company’s equity capital, i.e. that does not come from the sale of securities for creative projects or charitable causes.
In some cases, donations can support a start-up company, a new product in the design or production phase, sometimes with in-kind compensation such as early access to the product or service.
>>Investments (Crowdfund investing, CFI)
They refer to the acquisition of an equity interest in the company through the sale of financial instruments related to the company’s assets and/or financial performance. Investments include the acquisition of capital in the form of loans, the sale of the company’s patents and the sale of shares. In each case, many investors make modest investments as opposed to the more traditional model of banks, business angels, venture capitalists, who buy all or part of the company’s capital. They are the only ones in return for financing. >
In the “2013 Guide to ACP/AMF Participatory Financing for Platforms and Project Developers” published on 14 May 2013, platforms are referenced in three categories according to the crowdfunding model:
- the collection of donations or contributions that may give rise to various counterparts.
- the financing of a project through loans.
- the financing of an entrepreneurial project through the subscription of securities.
Depending on the financing terms chosen, a crowdfunding operator may be subject to compliance with banking and financial regulations, and as such, must comply with capital, licensing or registration requirements. In addition, rules of organisation and good conduct may be imposed. The nature of the activities carried out will determine the applicable requirements.
IV) The United States, Crowdfunding world benchmark
Today, more than 80% of the online population interacts with social networks regularly, despite the fact that 65% of the world’s population, or 4.6 billion people, still do not have access to the Internet (Mc Kinsey World Institute 2012).
Le ” Crowdfund investing” (CFI) has recently emerged as an alternative to more traditional financing tools such asthan bank loans or venture capital raising for financing and investmentin small and medium-sized enterprises (SMEs). Nevertheless, given the small amount of theinvestments and the specificities of the projects financed, crowdfunding did not initially seem to be able to generate the traditional sector.
However, the phenomenon is growing. There has been a strong growth in the volumes and funds raised worldwide: $1.5 billion in 2011; $2.7 billion in 2012; representing an 80% increase (Reuters 2012). Projections for the size of the global market are $3.98 billion (Best, Neiss, Stralser and Fleming 2013) or even up to $300 billion over the next few decades depending on the level of acceptance of the governments of the various countries and the legislation imposed (Heussner 2012).
At the legislative level, the first regulation seen in the United States is the JOBS Act (span style=”font-size: small;”>Le Jumpstart Our Business Startups en date du5 April 2012). It is a law that legalizes the use of small savers to finance startups, thus democratizing crowdfunding.
In practice, Emerging growth companies, i. e. most startups, become eligible for this new type of fundraising. They can raise up to $50 million from up to 1000 shareholders before having to register with the SEC.
In order to make these investments as secure as possible, the American Congress has added some safeguards, including the transmission of financial reports to investors and the limitation of amounts according to the annual income of each investor. The investor is limited to $2,000 or 5% of their annual income for an annual income of less than $100,000 or 10% for an annual income of more than $100,000.
V) And France in all this……. ?
Participatory financing is growing rapidly in France with an estimated collection for 2013 estimated at 70 million euros, up by more than 150% compared to 2012 (Source Association Financement Participatif France). Today, there are nearly 50 platforms that offer project leaders financing in the form of grants, loans or capital.
Up to June 2013, 503,395 people supported a project on a Crowdfunding platform, an increase of 386% compared to 2011. In 2011, the number of projects successfully financed was 9,392 compared to 23,953 at the end of 2013 (Source Association Financement Participatif France). The dynamics and strong growth of this phenomenon in the world do not exclude the French market, which follows the same trend with an estimated collection potential of €6 billion for 2020 in France.