Crowdfunding, which is a project or venture funded typically by raising small amounts of money from a large number of people, has been around for many years. And, with the growth of the Internet, so too have the amount of Internet-crowded platforms. And, with the rise of crypto-backed projects they have taken on a new dimension. But the $64 billion question is which funding route and medium should you choose?
If the project fails to reach its funding goal set at the outset, it is usually dropped from the fundraising platform and the pledges are returned to the backers. According to Fundly.com, the global transaction value in the crowdfunding segment amounted to $34 billion.
The mother of all crowdfunding platforms is Kickstarter, which launched back in 2009 and has received almost $4 billion in pledges from 15.5 million backers to date. Of course, there are many other crowdfunding platforms, some which are specific to countries such as Demohour in China and Wishberry in India.
Yet something more interesting has seemed to enter the world of crowdfunding, making it a little more crowded.
With the invention of Blockchain - or Distributed Ledger Technology (DLT) to give it its full name - and the subsequent birth of its by-product, cryptocurrency, a new kind of crowdfunding or community fundraising was soon to be born.
Bitcoin was the first cryptocurrency, released around a decade ago in 2009, and is still the king of coinmarketcap.com, but was followed soon after by many other coins and tokens. Today there are thousands of cryptocurrencies.
Every coin and token has their own proposition and blockchain-based solution to offer the world, with most solutions decentralized, mirroring the desires of the creator of Bitcoin, Satoshi Nakomoto. Decentralization creates a much more secure environment industry pundits argue, as opposed to centralized systems, which are easily hacked into and manipulated.
Initial Coin Offerings
It was in 2013 was when a new kind of crowdfunding took off, also known as the Initial Coin Offering or ICO, helping many cryptocurrencies and blockchain projects raise money through selling their coins or tokens. It allowed many people to participate in the growth of those projects. ICOs have also been known by many other names, including ITOs (Initial Token Offerings), TGEs (Token Generation Events) and more recently - the new kid on the block - Security Token Offerings (STOs), which some have argrued could be a real game changer.
Crowdfunding Scams
Kickstarter and other traditional crowdfunding platforms have had their fair share of scams. A University of Pennsylvania professor, Ethan Mollick, found in 2015 that that 9% of projects on Kickstarter failed to deliver rewards as promised, with a stated conclusion that: “Ultimately, there does not seem to be a systematic problem associated with failure (or fraud) on Kickstarter, and the vast majority of projects do seem to deliver.”
This is only on Kickstarter, and there are 2,000 crowdfunding sites to choose from. These crowdfunding platforms can represent hundreds of projects, with the average amount raised for a single crowdfunding campaign standing at nearly $5,000.
This is markedly different than the average amount of funds collected by a single ICO during 2018 and is smaller than during the previous year, standing at $11.52 million as against $24.35 million in 2017.
ICO Scams
The total amount raised by ICOs in 2018 was almost $11.4 billion, against little more than $10 billion during 2017, with a mere 13%. Of these amounts, it is estimated that in 2017, $1.34 billion of ICO funding was snaffled by scams. And, in 2018, a minimum of $1.7 Billion disappeared in theft and scams.
From the very beginning of the ICO era, much of the funding raised which was not lost in scams went to projects that never completed, or even started. 2015 marked the beginning of a series of very newsworthy scams which took hold of the crypto-community, with some investors in this space losing not tens, but hundreds of millions of dollars.
For example, one ICO scam, Pincoin, duped some 32,000 investors and ran off with $660 million in 2018, scamming some 32,000 people in the process, and Arise Banks’ ICO was shut down by the U.S. Securities & Exchange Commisson (SEC), but not before investors gave over $4 million to the founder and CEO, Jared Rice, Sr. (Note: The SEC has a dedicated page on the its website ("Spotlight on Initial Coin Offerings (ICOs")), to help potential investors in the space).
But regardless of the scams in this space, there are still many well-known, prestigious projects, which have not only made a huge success of their ICO crowdfunding efforts, but have gone to stratospheric levels.
Examples of these Ethereum, Lisk and IOTA. All of these projects, and more, started as crypto-crowdfunding based ICOs and have gone on to do exactly as they have promised, and more.
Many companies who do not have their own blockchain platform used Ethereum’s proprietary blockchain to crowdfund, through the creation of smart contracts, or ERC20s.
Smart Contracts
Smart contracts allow transactions to be undertaken without third parties, letting ICOs collect money from investors directly in exchange for being part of their fundraising efforts. Like Kickstarter or any other crowdfunding platform, ICOs also offer perks for investing, and sometimes unlawfully promise a substantial return on investment for participants’ investment.
Many people mused and even proclaimed that the ICO meant the death of crowdfunding platforms like Kickstarter, as written in articles such as this one. Yet with the rise in ICOs, and in the proportional number of crypto-crowdfunding scams, the rise in legislation has now caught pace, seeing a record number of ICOs shut down or fined, with investors only sometimes lucky to see their money returned.
This increasing stance on legislation of crypto-crowdfunding has seen a rise in the number of regulated STOs, purported to be the next generation of ICOs, with the number of unregulated ICOs decreasing.
As explained by Aviva Ounap at crypto and blockchain marketing agency Savii Digital: “STOs are more like the “everyman’s IPO”, giving everyone the chance to invest in a company that has been approved by the SEC) to list their cryptocurrency as a security, and hold a ‘stake’ in the company by holding those coins or tokens.”
But even with the number of STOs hitting the marketplace, it is nowhere near the pace that ICOs hit the ground running. Data collated by ICObench shows a very significant decrease.
Projects looking to raise funds through an STO must now file specific regulations with the official, federally regulated body in the country that their company is registered.
In the case of the SEC in the U.S., you must also file if you are a foreign company who would like to sell tokens to US based investors. These Regulations offer an SEC compliant way to offer tokens which are classified as securities for investment purposes.
Depending on what company structure an entity has, and how much they are looking to raise, the correct papers must be submitted, costing time and money. Any mistakes, whether by mistake or on purpose, can lead to fines and even jail. No longer can someone on a whim throw up a site, sell their cryptocurrency for a stake in their project (whether real or scam) and run with it.
The U.S. has been the most aggressive in the legislation of crypto-related projects, with many other countries swiftly following suit.
Yet with the decrease in the number of ICOs, the number of Kickstarter projects is on the rise gauging by the figures. At the last reported count this year, more than $4.06 billion had been pledged to projects on their crowdfunding platform.
According to Statista.com: “Kickstarter, which launched in 2009, is one of the largest crowdfunding platforms in the world, having launched over 412,000 projects and having received pledges worth more than $3.9 billion as of October 2018.” And, this is slated to grow even more in 2019, and beyond.
In a twist of irony, there is currently a project on the Kickstarter platform, which aims to educate the next generation of techies on blockchain and cryptocurrency.
This is namely, Bob the Blocktrain: The Series, which only launched this week (March 16 2019) on Kickstarter, and is aiming to create an animated series covering the topics of cryptocurrencies and blockchain in a fun yet educational way, and looking to raise a mere £9,000 (c.$11,880). There are benefits for supporting the project, which are detailed on the Kickstarter page.
According to the Kickstarter page, they already have a successful book, Meet Bob the Blocktrain, and “thought the natural next step would be a cartoon series of Bob and his friends, the Nodes, on their adventures through the magical and mysterious Blockchainland,” according to Ounap in London.
They are making this series in English and Chinese to start with, but venture has revealed that they know “that this educational series will teach children of all ages about the applications of blockchain and get them ready for the next wave of technology. “This series will probably benefit many adults, too, who need to understand what blockchain is, what it is used for, and even what cryptocurrencies are and how they are used,” their page states on Kickstarter.
Regardless of the method of crowdfunding, there is now a world of opportunity for potential backers to spread their investments and increase the sizes of their portfolio. Investing in such projects is no longer just the preserve of the rich. With crowdfunding, it is now an everyman’s world. More power to your elbow.
Note: The SEC has a page on the regulator's website ("Spotlight on Crowdfunding") on the risks for investors considering an investment in the space, as well as information on intermediaries and companies.
