Tahir’s Tips: Crowdfunding from a Legal Perspective

March was a busy month for crowdfunding. One of the world’s largest crowdfunding platforms, Kickstarter saw its billionth dollar invested, while the Financial Conduct Authority (FCA) released a policy statement on how it intends to regulate the investment vehicle over the internet.

Previous articles on The Industry have noted how the use of crowdfunding has grown massively over the last few years, as traditional methods of funding have been tightened. This is especially true for emerging fashion brands and fashion related start-ups who have faced a difficult time getting the financial and marketing support they need.

Crowdfunding platforms such as Kickstarter, Indiegogo, Rockethub and Crowdcube have provided fashion entrepreneurs with an alternative method of obtaining investment and reaching out to their customers. Statistics provided by Kickstarter show that there have been 1,622 successfully funded fashion projects through the Kickstarter website, with one of these raising over $1,000,000. The Pebble Smartwatch has so far received the highest number of investments having raised over £6.1 million.

As well as funding fashion projects, crowdfunding is also helping to increase creative innovation within the industry, while handing back power to the customer. Instead of going into a shop and choosing from a limited range of designs, crowdfunding offers customers the opportunity to help finance and therefore contribute to the creation of a much larger range of designs that they would otherwise probably never have come across. This form of direct customer investment is a blessing for up-and-coming designers, as not only are they able to tap into a new form of finance but a new customer base too – even without existing connections in the fashion industry.

What exactly is crowdfunding? 

Crowdfunding is simply raising money directly from a large number of people who all typically put in relatively small amounts of cash. This is often done through online platforms and social media outlets to reach thousands, if not millions of potential investors.

There are three main types of crowdfunding:

Debt Crowdfunding

Investors loan money directly to an individual and hopefully receive their money back with interest. Also called peer-to-peer (P2P) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in. Examples of debt crowdfunding platforms include SoMoLend and Lending Club.

Equity Crowdfunding

Investors buy shares in a company and become part owners. They make a return on their investment either by being paid a dividend or by selling their shares at a later date, when the company value has hopefully increased. It is up to the board of the company to decide whether to declare a dividend and how much, and if and when to sell the business, so equity crowdfunding tends to carry a higher risk for investors (but potentially the highest returns). Examples of equity crowdfunding platforms include Crowdcube, Seedrs, EarlyShares and Fundable.

Donation Crowdfunding 

People pay money to an individual simply because they believe in the cause or like the items being made. Rewards are often offered to the investor (and such rewards tend to be better the more money has been given). Examples of rewards can be: the actual item the project has been set up to fund, tickets to an event, regular news updates, free gifts, credits in the project and so on. This is a popular crowdfunding platform for emerging designers who are looking for a direct and cost effective way to reach customers. Often, this type of crowdfunding can be simply seen as a way of pre-selling innovative items before they are made (e.g. the Pebble Smartwatch). Examples of donation crowdfunding platforms include Kickstarter, Indiegogo and RocketHub.

Keep an eye out for the second part of "Crowdfunding from a Legal Perspective" published on The Industry next week.

For more information on Industry member, Tahir visit his personal partner page on the Sheridans website. To contact him directly, visit The Industry Directory, email [email protected] or telephone 020 7079 0103.