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COMMENTARY
Crowdfunding industry—History, development, policies, and
potential issues
Ying Zhao |Phil Harris |Wing Lam
Business Research Institute, University of
Chester, Chester, UK
Correspondence
Phil Harris, Business Research Institute,
University of Chester, Chester, UK.
Email: p.harris@chester.ac.uk
Crowdfunding has gained a great deal of attention from policy makers, researchers,
and practitioners. This paper attempts to provide an overview of the history and
development of the industry and discusses different types of crowdfunding and their
public policies. It is identified that the operation of peer‐to‐peer lending and equity‐
based crowdfunding is regulated by the Financial Authority; the reward‐based
crowdfunding (RBC) and donation‐based crowdfunding (DBC) is yet to be regulated,
neither in the United Kingdom or United States. The lack of rules and regulations in
the latter two models highlights the burning issues such as potential fraud and mal-
practice. Therefore, we suggest that it is timely to consider regulating the two types
of crowdfunding possibly by governance mechanism with reporting requirements to
keep track of the fund and to provide timely information. Additionally, it is advisable
that practitioners to work on an agreed framework to establish industry standard, so
potential investors can compare and assess the quality of projects easily. Finally, the
management of crowdfunding platforms especially the RBC and DBC platforms
should be improved. The ease of launching campaigns has made it difficult for both
initiators and investors to succeed in the crowdfunding process. Further research to
develop some form of assessment framework would be useful to both parties.
1|BACKGROUND AND RATIONALE
Entrepreneurship as the life‐blood of economy is widely recognised
(Global Entrepreneurship Monitor, 2018). Among the many areas
related to entrepreneurship, access to finance has become an
institutionalised topic in terms of public policy and small and
medium‐sized enterprises (SMEs) research (Crosetto & Regner, 2018;
Korosteleva & Mickiewicz, 2011; Mason & Harrison, 2000). However,
studies repeatedly suggest that the funding gap is unlikely to be
narrowed due to asymmetry of information and expectations: “entre-
preneurs believe that they can somehow make a profit, but the inves-
tors (and lenders) do not”(Bhidé, 2003, p. 39). The consequence, as
observed by Bygrave et al. (2003, p. 113), is that “many entrepreneurs
waste a lot of valuable time by prematurely seeking seed capital from
business angels and even from formal venture capitalists—searches
that come up empty‐handed almost every time”. In fact, the reality is
that demand for finance will always outweigh supply by a huge mar-
gin, and no government has the resource to address the funding gap
(Lam, 2010; Owen & Mason, 2017). Indeed, despite the self‐reported
“success”of efforts to fill the funding gap over the last few years, the
proportion of SMEs gaining finance through formal, external sources
remains very low. The latest report from the Bank of England shows
that lending to SMEs in the United Kingdom has contracted since
2012 (British Broadcasting Corporation, 2014). Also, a report by the
Department of Business, Innovation and Skills (BIS) suggest that less
than 50% of the SMEs utilise any form of external source of finance
(including credit cards and overdrafts); only 11% of those SMEs use
bank loans (including commercial mortgage) and between 1% and 2%
attempt to obtain equity finance (Department for Business, Innovation
and Skills, 2012). These findings highlight the issue of financing from
supply and demand sides and challenge the government's dispropor-
tionate attention to encouraging greater supply of finance available
to SMEs. Putting aside the issue of affordability, even if there were
sufficient resources, demand‐side constraints related to SMEs and
new ventures make it inefficient, if not unjustifiable, to use public
resources for this purpose (North, Baldock, & Ekanem, 2010). Such
DOI: 10.1002/pa.1921
J Public Affairs. 2019;19:e1921.
https://doi.org/10.1002/pa.1921
© 2019 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of9
constraints include high risks, lack of sound‐track record, nature and
characteristics of the business, and the perception and attitude of
owner managers towards external finance (Carter & Van Auken,
2005; Jonsson & Lindbergh, 2013).
As a result of the lack of progress in seeking formal external find-
ing, nascent entrepreneurs have attempted to seek alternative
sources of finance to fund their new projects. In recent years,
crowdfunding has emerged as “novel way for entrepreneurial ven-
tures to secure funds without having to seek out venture capital or
other traditional sources of venture investment”(Mollick, 2014, p.
2). Crowdfunding refers to the use of a crowd (crowdfunders) to raise
funds via online platforms (crowdfunding platforms), in which individ-
uals who are interested in the new project pledge a relatively small
amount of capital to support the project. The ease of use and wide
accessibility of crowdfunding has made it grow very rapidly in recent
years (Beaulieu, Sarker, & Sarker, 2015; Kuppuswamy & Bayus,
2015a). When signing the JOBS Act to legalise equity crowdfunding,
U.S. President Obama commented that “for start‐ups and small busi-
nesses, this bill is a potential game changer.”One prediction, made
for the World Bank, suggests that this kind of alternative finance
may be worth more than $93 billion by 2025 (Gregory, 2013). From
time to time, media report “success”stories about projects that are
exceedingly overfunded. For example, in August 2012, Ouya, an
unknown computer game firm, became an Internet legend by
reaching an ambitious funding target for a new console within 8 hr
of listing and then went on to raise more than US$8 million on the
crowdfunding platform Kickstarter. In Jun 2017, Gary Usher, a local
restaurant owner, became an Internet legend on Kickstarter by
reaching an ambitious funding target for a new restaurant, raised
more than £200,000 on the crowdfunding platform Kickstarter,
which was once reported as “the most funded restaurant project”
on Kickstarter (Adams, 2017).
Although it seems an ideal alternative source of finance for new
venture creation, there are certain crucial issues in this rapidly growing
“industry”that has made some dreams go sour. One of the key issues
facing crowdfunding is the lack of awareness and understanding about
the industry, the rules and regulations, the potential risk, and relevant
public policies. This paper is aimed at shedding some lights in this rap-
idly growing phenomenon and to provide an overview of the industry,
the relevant policies, and the potential issues related to the industry.
In the following section, an overview of crowdfunding industry will
first be introduced. This is then followed by discussion of the relevant
rules and regulations. The potential issues related to the industry will
then be covered; this is then concluded by implications and
suggestions.
2|CROWDFUNDING INDUSTRY—
HISTORY, TYPES, AND FUNCTIONS
In recent year, crowdfunding has become a popular fundraising
method in the alternative finance industry (Bretschneider, Knaub,
& Wieck, 2014; Thurridl & Kamleitner, 2016; Zheng, Hung, Qi, &
Xu, 2016). Some scholars considered crowdfunding as a form of
crowdsourcing (Bretschneider et al., 2014; Kuppuswamy & Bayus,
2015b; Thurridl & Kamleitner, 2016), which has a long and rich his-
tory with roots going back to the 1700's. Crowdsourcing was ini-
tially designed for a focal firm to get others to solve problems or
access knowledge from areas where the firm may not normally
have access (Jeppesen & Lakhani, 2010). Although Schwienbacher
and Larralde (2010, p. 5) define crowdfunding as “an open call,
essentially through the Internet, for the provision of financial
resourceseitherinformofdonationorinexchangeforsomeform
of reward and/or voting rights in order to support initiatives for
specific purposes,”considering the other cases labelled
“crowdfunding”such as Internet‐based peer‐to‐peer (P2P) lending,
a broader definition is given by Mollick (2014, p. 1) who defines
crowdfunding in an entrepreneurial context as “the efforts by
entrepreneurial individuals and groups—cultural, social, and for‐
profit—to fund their ventures by drawing on relatively small contri-
butions from a relatively large number of individuals using the
Internet, without standard financial intermediaries.”
As shown in Figure 1, the history of crowdfunding can be traced
back to 1800s. Then in 2000, in the United States ArtistShare was
launched as a website where musicians could seek donations from
their fans to produce digital recordings. Later, it has evolved into a
fundraising platform for music, film/video, and photography projects.
According to Freedman and Nutting (2015), the first crowdfunding
project was Maria Schneider's jazz album. A tiered system of rewards
were offered; for example, for a $9.95 contribution, a backer could be
among the first to download the album; fans who contributed $250 or
more their names could be listed in the booklet of the album as who
“helped to make this recording possible”; and one fan who contributed
$10,000 was listed as executive producer (Freedman & Nutting,
2015). This initial tiered system of rewards are still in use in the
reward‐based crowdfunding (RBC) platforms currently, for example,
the most prominent ones—Indiegogo and Kickstarter. The launch of
JustGiving announced the start of donation‐based crowdfunding
(DBC) communities, in which “funders voluntarily donate their money
with no expectations of any tangible reward”(Burtch, Ghose, &
Wattal, 2013a; Smith, Windmeijer, & Wright, 2015). Research on
these types of DBC communities draw on the extensive literature
involving philanthropy and public goods (Andreoni, 2006; Vesterlund,
2006); then free‐riding becomes an issue where the contributions
can be crowded out by the prior funding decisions of others
(Bergstrom, Blume, & Varian, 1986). Gerber, Hui, and Kuo's (2012)
qualitative studies find that rewards are one of the most important
motivations for participating in crowdfunding communicates
(Steinberg, 2012), which explain the launch of Indiegogo and
Kickstarter in succession in 2008 and 2009 as RBC platforms. Prior
to this, the launch of ZOPA in 2006, a P2P lending platform
“empowers members to construct their financial identities by allowing
them to make complex financing decisions”(Ortega & Bell, 2008).
Naval Ravikant, on the other hand, founded AngelList in 2010, an
online equity‐based angel investing platform, built to reduce search
frictions and “improve the matching between start‐ups and potential
2of9 COMMENTARY
investors”(Bernstein, Korteweg, & Laws, 2016) The company is
argued to have the potential to reshape the venture capital landscape
and early‐stage funding (Kolodny, 2013; Ramsinghani, 2013; Stone,
2014; The Economist, 2014).
In the same year as AngelList, Gofundme was launched as the first
charity‐based crowdfunding platform in 2010. Existing studies suggest
that both warm glow and pure altruism play an important role for
donors in electronic charitable crowdfunding markets (Burtch et al.,
2013a; Burtch, Ghose, & Wattal, 2013b; Gleasure & Feller, 2016;
Wash, 2013). The launch of CrowdFunder and Circleup unveils
equity‐based crowdfunding (EBC), offer a platform on which one can
sell shares of a company (Fleming & Sorenson, 2016), especially
CircleUp focusing on consumer products and retail (Freedman &
Nutting, 2015) has helped 106 companies raise over $125 million
(Mollick & Robb, 2016). In 2012, the passes of JOBS Act legalise
equity crowdfunding by relaxing various restriction concerning the
sale of securities (Agrawal, Catalini, & Goldfarb, 2013). Prior to this,
issuers of private securities could not advertise their offerings or
solicit investors generally (Freedman & Nutting, 2015). “For the first
time, ordinary Americans will be able to go online and invest in
entrepreneurs that they believe in,”Obama explained (McCracken,
2015) when signing the Act. In short, as a means for mobilising
resources, crowdfunding has become an increasingly important force
in global finance (Assenova et al., 2016). It is clear that the industry
is “pushing boundaries of market growth, business models, public
awareness, corporate partnerships, institutional funding, product inno-
vation, international expansion”and further regulatory support. More-
over, the crowdfunding market is “growing increasingly complex, fluid
and dynamic”(Zhang, Baeck, Ziegler, Bone, & Garvey, 2016).
Among them, RBC is one of the oldest online alternative finance
models. It grows from £26 million in 2014 to £42 million in 2015,
whereas the U.K. online alternative finance market facilitated loans,
investments, and donations amounted to £3.2 billion in total (Zhang
et al., 2016). It is therefore of value to discuss the
different crowdfunding models, with particular attention on RBC.
In the U.K. alternative finance industry, transaction volume is
clearly driven by debt‐based and equity‐based models, which can gen-
erate financial returns for lenders and investors (Zhang et al., 2018).
The P2P business lending was the largest alternative finance model,
accounting for 48.6% in the overall industry. In comparison,
FIGURE 1 Timeline of crowdfunding
Sources: (Chen, 2016; Freedman & Nutting,
2015; Fundable, 2017; Nesta, 2013)
Timeline of crowdfunding
1886
The pedestal on which the statue of Liberty gets crowdfunded by New York
Citizens
2000
ArtistShare, the first reward based crowdfunding website for music, launches the
dedicated crowdfunding platform to help artists obtain funds
2000
Internet-enabled giving goes mainstream with the emergence of sites such as
JustGiving
2005
Kiva launches which is the first major microloan platform for entrepreneurs in
underprivileged countries
2006
Michael Sullivan, founder of FundaVlog, is credited with coining the term
'crowdfunding'
2006
First peer-to-peer lending platform is released with Prosper with the launch of
ZOPA
2008
The economic crisis occurs, big banks begin to cut back small business lending
2008
Indiegogo launches reward-based crowdfunding platform
2009
Kickstarter launches reward-based crowdfunding platform
2010
AngelList unveils equity based angel investing. Gofundme launches charity-based
crowdfunding
2011
Crowdfunder & CircleUp launch equity-based platforms
2011
Obama Administration reveals the Startup America Initiative focused on rebooting
small business
2012
Obama Administration passes the Jumpstart Our Business Startup Act a.k.a. JOBS
Act
2014
Kickfurther launches first inventory-based crowdfunding platform
2015
Title III of the JOBS Act passes allowing non accredited investors to invest in
equity of companies
Sources:(Chen, 2016; Freedman & Nutting, 2015; Fundable, 2017; Nesta, 2013)
COMMENTARY 3of9
crowdfunding models such as such as DBC and RBC, which do not
involve monetary return, account for relatively small proportion.
In the crowdfunding industry, a project is considered as successful
when it can gain enough financial support from the crowdfunders.
There are different types of crowdfunding in the market, it is
categorised into four models: equity based, lending or loan based,
reward based, and donation based (Mollick, 2014).
2.1 |Peer‐to‐peer lending
The lending‐based or loan‐based crowdfunding (Financial Conduct
Authority, 2018), also known as “P2P lending,”is where “consumers
lend money in return for interest payments and a repayment of capital
over time.”
P2P lending platforms are defined as media where
individuals/business using them to borrow from a number of individ-
ual lenders each lending a small amount. In other words, they are
the online platforms whereby individuals can lend and borrow money
to each other, hence most are unsecured personal loans (Baeck,
Collins, & Zhang, 2014; Wardrop, Zhang, Rau, & Gray, 2015).
According to Baeck et al.'s study (2014), over the last 2 years,
P2P business lending has experienced an impressive growth, with a
288% increase from the £193 million in 2013 to £749 million in
2014 and evolves to become an “important force in the UK con-
sumer credit and lending space.”Among 3,112 P2P business loans
analysed, most borrowers are from the manufacturing, professional
business services, construction, or retail sectors and on average
borrowed £73,222 from 796 lenders, with the average loan being
just £91.95 (Baeck et al., 2014).
There are strict requirements for borrowers (Baeck et al., 2014;
Fong, 2015; Tang, 2018). The borrowers need to have an A or A+
credit rating to be put into the “prime”or “super‐prime”borrower cat-
egory, even so the average rejection rate is still as high as 90%, that is,
nine out of 10 loan applications are rejected (Baeck et al., 2014).
Although that is one of the key reasons that the P2P consumer lending
platforms have a very low default rate, less than 1% (Baeck et al.,
2014; mainly due to low rate of successful lending).
On the demand side, borrowers who seek to borrow via P2P busi-
ness lending most commonly seek a loan for expansion and/or growth
capital (41%) and working capital (34%). They choose these platforms
mostly because the combination of the speed and ease of use of the
model (Baeck et al., 2014). Ninety‐one percent of borrowers highlight
how they see P2P business lending as an easier way to get funded
than traditional channels (e.g., bank) as a key factor in their decision
to choose this lending model (Baeck et al., 2014).
On the supply side, lenders are primarily motivated by the financial
return available. Some also stated that the service that P2P business
lending offers, in terms of the ease of lending process (important or
very important to 87%), diversifying investment portfolios (important
or very important to 88%), and having control over where the lent
money is going (important or very important to 81%) were key to their
decision to lend (Baeck et al., 2014).
2.2 |Equity‐based crowdfunding
The EBC, also called as investment‐based crowdfunding, involves
consumers invest directly or indirectly in new or established busi-
nesses by buying investments such as shares or debentures. The sec-
tor experience rapid expansion with a 201% year‐on‐year growth
rate and facilitated £84 million in predicted total transaction volume
for 2014 (Baeck et al., 2014; Wardrop et al., 2015). The fundraisers
come from a diverse range of sectors, from high tech and health care
to consumer products. In comparison with P2P, a larger average
amount is funded, for example, a typical amount of £199,095 from
125 investors is raised (Baeck et al., 2014). EBC primarily invest
through EBC platforms in the hope of making a financial return
(61% of the investors surveyed). Portfolio diversification, the ease
of the investment process, and the added control over where their
money goes were also seen as important or very important to more
than 75% of surveyed investors. Few investors involves in investing
in a family member or a friend or to support a local business. Instead,
investors are selecting specific investment opportunities on the
crowdfunding platform, with the quality of the team (rated “impor-
tant”or “very important”by 97% of respondents) and the pitch
(96%) named as the most important factors. External endorsements
and the views of other investors on forums were deemed less impor-
tant (Baeck et al., 2014).
2.3 |Donation‐based crowdfunding
DBC involves people giving money to enterprises or organisations
they want to support (Financial Conduct Authority, 2015). Individuals
donate small amounts to meet the larger funding aim of a specific
charitable project whilst receiving no financial or material return in
exchange. There is no legally binding financial obligation incurred by
recipient to donor; no financial or material returns are expected by
the donor (Baeck et al., 2014; Kshetri, 2015; Mitra, 2012; Zhang
et al., 2016).
DBC allows fundraisers, primarily from social and cultural groups,
creative enterprises, and community‐based organisations to directly
make an online appeal for donations. DBC disintermediate the existing
charitable‐giving sector by connecting donors directly with fundraisers
and beneficiaries, for often small‐scale and local projects. This rela-
tively new model has already contributed about £2 million a year to
good causes, social projects, and community initiatives (Baeck et al.,
2014). Personal connections play a strong role in matching backers
and fundraisers within the DBC model. Fifty‐two percent of surveyed
backers reported that the first introduction they had to this type of
alternative finance came through recommendations made by a friend
or family member or other first or second‐degree social connections.
Building on this, social media plays a strong role in getting backers
to support DBC campaigns, with 68% of backers finding out about
the first campaign they supported through this medium. The social
and communal nature of DBC is, as expected, the primary draw for
funders (Baeck et al., 2014).
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2.4 |Prepayment or RBC
In RBC, people give money in return for a reward, service, or product
(such as concert tickets, an innovative product, or a computer game). It
is based on “an exchange of a monetary contribution”for some non-
monetary reward; backers would expect that “fund recipients”provide
“a tangible but nonfinancial reward or product”at a later date in
exchange for their contributions. In an RBC project, various levels of
rewards/pledges would be introduced based on different pledge
amounts from backers (Burtch et al., 2013b; Lin, Lee, & Chang,
2016; Thurridl & Kamleitner, 2016; Zhang et al., 2016). Unlike the
equity‐based capital mentioned above, all RBC campaigners retain
their control in the business and intellectual property rights: patents,
trademarks, and copyrights. In other words, RBC platforms are “not a
producer or publisher or marketer, but a sophisticated intermediary
that connects campaigners with backers and enables them to commu-
nicate among themselves in order to assess the merits and prospects
of the campaign”(Freedman & Nutting, 2015, p. 3).
RBC is the type of alternative finance that registered the highest
usage rate (8%) in their national consumer poll among all surveyed
models. The growth of the market is quite remarkable (Baeck et al.,
2014; Freedman & Nutting, 2015; Kraus, Richter, Brem, Cheng, &
Chang, 2016; Kshetri, 2015; Zhang et al., 2016). RBC has seen a
steady increase of 17% in 2014 from £20.5 million in 2013 to over
£26 million in 2014. In 2015, £42 million was facilitated through
RBC platforms, with a 61% year‐on‐year growth rate, although the
figure experienced a decline in volume in 2017 (Baeck et al., 2014;
Zhang et al., 2016, 2018). In 2017, in total £44 million was facilitated
through RBC platforms, an 8% decrease from 2016, which is the first
year the model has decreased. Nevertheless, the onboarding/
qualification rate decreased from 32% in 2015 to 28% in 2017, and
the number of both successful campaigns and repeat fundraisers
increased (Zhang et al., 2018). According to the data in industry report,
social media and social networks are key to fundraising success (Baeck
et al., 2014). Backers generally found out about the campaign through
social media or direct mailing. In many cases, they also had some con-
nection to, or knowledge of, the fundraiser prior to the crowdfunding
campaign. Most backers gave funds to someone they knew at least by
reputation, and only 28% had backed someone they did not know
(Baeck et al., 2014).
One of the most common mode in RBC is founder‐take‐it‐all,
which works as follows:
1. A founder (crowdfunder) list a new project in a crowdfunding
platform, specifying the detail of the project (nature, product, ser-
vice, industry, progress of the project, etc.), the target amount it is
aiming to achieve, and what it will offer in return—this can be a
product that it is aiming to develop (reward based), certain
amount of share of the new venture (equity based), repay the
amount and interest the funder offers (lending based), acknowl-
edgement of the contribution and report the outcome of the pro-
ject (patronage model) or other forms of physical or psychological
benefits.
2. The project listed on the platform will then be viewed by the public
(potential funder).
3. Interested funders can then make a pledge about how much
money they would like to offer to support the project.
4. If the target amount is reached within the deadline, the project is
considered as successful. The crowdfunding platform will then
transfer the total amount to the founder. In the case that the pro-
ject is overfunded, the founder still receives the total amount and
not just its target amount. On the contrary, if the target amount is
not reached, the project is considered as unsuccessful, the
underfunded project will end, and the amount pledged will be
refunded to the individual funders.
5. A project that has successfully received funding should then go
ahead with the project and update progress made in the
crowdfunding platform.
In summary, there are different type of online crowdfunding, with
different function and procedures. In what follows, the rules and reg-
ulation of the crowdfunding industry is discussed.
3|RULES, REGULATIONS, AND RISK
The rules and regulations of crowdfunding is evolving (Mollick, 2014).
In 2012, U.S. president Obama signed the JOBS ACT to legalise equity
crowdfunding. In the United Kingdom, loan‐based crowdfunding and
investment‐based (equity based) crowdfunding are regulated by the
Financial Conduct Authority (FCA). In this article, we will mainly focus
on the policies of loan‐based and investment‐based crowding in
United States and United Kingdom.
In the U.S., the passes of JOBS Act in 2012 legalise equity
crowdfunding by relaxing various restriction concerning the sale of
securities (Agrawal et al., 2013). In the Act, it requires that
crowdfunding issuer must prepare annual reports of its operations
and financial statements. There is no exemption even for offerings
below $100,000 of this annual reporting requirement, which could
effectively support the investors with the financial condition of the
issuer both before and after the offering (Whitbeck, 2012). On the
other hand, “the JOBS Act is a shift away from the principles underly-
ing U.S. securities laws in favour of a largely unregulated system”
(Stemler, 2013). The JOBS Act increases by tenfold the amount of
funds businesses can raise under the Regulation A, to US$50 million.
In addition, the JOBS Act allows businesses using Regulation D to
solicit broadly for investors (i.e., use general advertising) and to sell
to an unlimited number of accredited investors (Whitbeck, 2012).
Under the crowdfunding section of the JOBS Act, entrepreneurs and
small business owners may use the crowdfunding exemption to raise
up to $1 million within a 12‐month period without registering the
sales with the SEC. However, on the side of investors, there is limita-
tion of their maximum amounts they can invest. One can invest the
greater of $2,000 or 5% of his annual income or net worth if it is under
COMMENTARY 5of9
$100,000; the proportion goes up to 10% if the figure is over
$100,000 (Stemler, 2013).
In the United Kingdom, similarly, the main rule is to protect inves-
tors in this part of crowdfunding market through ensuring they can get
access to clear information (Financial Conduct Authority, 2018). On 1
April 2014, the responsibility for regulating loan‐based crowdfunding
platforms are transferred to the FCA. In the same year, new consumer
protection rules including marketing restrictions for investment‐based
crowdfunding market are also introduced, so firms may only make
direct offer promotions to retail consumers who meet certain criteria
that the investors must be those “who take regulated advice,”“who
qualify as high net worth or sophisticated investors,”or those “who
confirm they will invest less than 10% of their net assets”(Financial
Conduct Authority, 2015, p. 2).
It is also required that firms need to check whether investors under-
stand the risks, and these protecting mechanisms are usually built in the
equity‐based platforms, such as Seedrs; the first‐time investors need to
sign up with a series of questions and terms and conditions to confirm
that they understand the risk and related regulations.
Since the introduction of the “10 percent”rule by FCA in 2014,
EBC is better known and the volume is rapidly increasing (Kshetri,
2015; Sharman, 2014). Moreover, in the United Kingdom, the issuers
in this part of crowdfunding can get HMRC confirmation of their Seed
Entreprise Investment Scheme or Enterprise Investment Scheme sta-
tus before their launch of the campaign.
Unlike the EBC, the RBC, by far the most prevalent form of
crowdfunding, is yet to be regulated. As a result of this, currently,
the crowdfunding platforms neither have enforcement mechanism to
prevent con artists from using the system to raise funds for fake pro-
jects nor have any law to protect the interest of the funders in the
case of fake or unsuccessful projects. Even when it is a genuine pro-
ject, there is no governing mechanism to monitor the progress of the
new projects. The only source of information is relying on the foun-
ders to post updates in the crowdfunding platform on a voluntary
basis. This concern is shared by practitioners of the industry. In Zhang
et al.'s (2016) study, platforms were asked about their perception of
the biggest risks to the future growth of the market. The highest rank-
ing was “the potential of a collapse of one or more of the well‐known
platforms due to malpractice”(Zhang et al., 2016).
In addition to the lack of regulations, especially in the RBC models,
there are other issues facing this rapidly growing industry.
4|INDUSTRY STANDARD
As it is an emerging industry, there is a lack of industry standard. The
U.K. Crowdfunding Association, which was formed in 2012 by 14
crowdfunding businesses, has provided a code of practice on their
website (http://www.ukcfa.org.uk/code‐of‐practice‐2). But it has only
provided basic guidelines on what crowdfunding should do to make
sure that the project information is available to the funder, especially
in the case of the failure of a crowdfunding platform. It does not specify
any requirements to ensure the authenticity or quality of the projects.
5|QUALITY OF NEW PROJECTS
An exploratory study by Mollick (2014) suggests that quality of the
projects is a strong indicator of the success of crowdfunding projects.
However, crowdfunding projects differ significantly, and there is a lack
of standard or tool that can be used to assess the quality of projects.
Funders can only rely on virtual information available such as the qual-
ity of the project video, the speed of project updates, the size of the
founders' online network (e.g., number of Facebook friends), or even
the spelling errors of the project text to assess (and effectively second
guess) the quality of the projects and then based on this to make their
investment decisions.
6|PROJECTS “LOST AT SEA”
One reported phenomenon in the crowdfunding industry is that many
entrepreneurs found their projects “lost at sea”as there are so many
projects listed and it has become very difficult for small players to
get noticed. This is particularly the case for small business start‐ups
in traditional industries as most of the successful crowdfunding pro-
jects fall into categories of hardware, software, games, or product
design (Belleflamme, Omrani, & Peitz, 2015). Some entrepreneurs
even express that they would be taken more seriously by NOT listing
their projects on crowdfunding platforms (Gregory, 2013). As a conse-
quence, crowdfunding as a “game changer”or alternative source of
finance for entrepreneurship is questionable.
Studies suggest that in RBC, the factors of project quality such as
the project goal, duration, initiator participation, and entrepreneurs'
experiences significantly influence the project success (Bi, Liu, &
Usman, 2017; Hou, Wang, & Ge, 2015; Li & Martin, 2016). Other
researchers focused on the motives of RBC funders (Bretschneider
et al., 2014; Galuszka & Victor, 2014; Hossain & Oparaocha, 2017;
Steigenberger, 2017). Creative rewards, supporting others (Hossain
& Oparaocha, 2017), and recognition motivation (Bretschneider
et al., 2014) were believed to be the most important motivation. How-
ever, so far, none of the research considered the relationship between
these different influencing aspects and their roles on the success of
campaigns; in short, the use of crowdfunding as an alternative source
of finance still needs to be further investigated.
7|CONCLUSIONS AND FUTURE
DEVELOPMENT
In light of the rapid growth in the crowdfunding industry and its grow-
ing importance to business in the last few years, this paper attempts to
provide an overview of the history and development of the industry.
The different types of crowdfunding is first discussed. There are cur-
rently four main types of crowdfunding types: P2P lending, EBC;
DBC, and RBC. As discussed, each type serves different purposes
and have different governance mechanism. The public polies related
to each type of crowdfunding is then discussed. Although the opera-
tion of P2P and EBC is regulated by the Financial Authority, the
6of9 COMMENTARY
RBC and DBC are yet to be regulated, neither in the United Kingdom
or United States. Given the size of RBC and its importance to individ-
uals and small businesses, the lack of rules and regulations highlights
the burning issues of potential fraud, either intentional or uninten-
tional. In addition, there are several issues identified: First, the lack
of standard has made it difficult for both initiators and investors to
make informed decisions in the process of crowdfunding. Second,
the differences in project quality made it difficult for investors to com-
pare the projects from one to the other pose a major issue. Third,
there are many projects “lost at sea”that the initiators fail to raise
enough fund to support their ventures.
It is therefore necessary for relevant parties to begin dialogues to
address the issues identified (and those not yet identified). In light of
this, the following suggestions are made that we hope can open the
dialogues with relevant parties:
1. As discussed, P2P and EBC are regulated but not DBC and RBC.
Given the size of the market and its growth, it is timely to consider
regulating the DBC and RBC, especially RBC. Perhaps one of the
difficulties is its nature, which lies between investment, consump-
tion, and donation. Perhaps governance mechanism with reporting
requirements can be set up to keep track of the fund and to pro-
vide timely information to all relevant parties during the process.
This is particularly important after the fund is raised, which cur-
rently even if the initiators run away with the fund, by law, it is
not illegal.
2. There is a lack of industry standard that makes it difficult for both
initiators to follow. In some crowdfunding website, there are cer-
tain templates that initiators can use when posting their projects,
but it is by no means universally accepted. It is advisable for prac-
titioners to work on an agreed framework so that initiators can use
it to better prepare for their projects, whereas potential investors
can use it to compare and access the quality of specific projects.
3. The ease of initiating project in crowdfunding platforms has made
it more difficult for both initiators and investors to succeed in the
crowdfunding process. For the initiators, many crowdfunding pro-
jects “lost at sea”do not receive the attention they deserve. The
potential investors, on the other hand, found it hard to spot prom-
ising projects, mainly because of the vast number of projects avail-
able and lack of assessment mechanism for them to objectively
assess the projects. Further research to develop some form of
assessment framework would be very useful to both initiators
and investors.
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AUTHOR BIOGRAPHIES
Ying Zhao is a doctoral student at the Faculty of Business
Research Institute/China Centre at the University of Chester.
Her research focuses on understanding reward‐based
crowdfunding as an alternative source of entrepreneurial financing
as part of her PhD thesis. She holds a first degree in Accounting
and Finance, a Master's degree in international financial Analysis,
and an MBA degree in Global Financial Services.
Phil Harris is the Executive Director of the Business Research
Institute and China Centre at the University of Chester and holds
the Westminster Professorship in Marketing and Public Affairs.
Professor Harris is one of the founders of research and theory
development in strategic public affairs management, political mar-
keting, and economic and governmental communication. He is the
founding editor of the Journal of Public Affairs and a member of a
number of international editorial and advisory boards and has
authored over 200 articles and 20 books. He has worked in the
chemical, food, and media industries and taught and advised Busi-
nesses and Government in Asia, Europe, and North America. He
holds six professorships in Beijing, Dalian, Guilin, Jiangsu, Wuhan,
and Xiamen in China and is regularly called upon to advice and
comment on China, Entrepreneurialism, International Business,
Machiavelli, and Marco Polo.
Wing Lam is an Associate Professor in Entrepreneurship at Univer-
sity of Chester. She is currently the Deputy Director of Business
Research Institute and Director of China Centre. She also holds
visiting professorships in Dalian Minzu University and Guangxi
Normal University in China. Before pursuing an academic career,
Dr. Lam spent nearly 10 years in commerce (international trading,
consultancy, and internal auditing) in her native Hong Kong. Her
international, industrial, and academic backgrounds help shape
her research areas and thus her academic career. Dr. Lam pub-
lished widely in top tier academic journals including Entrepreneur-
ship: Theory & Practice and British Journal of Management and
won several national and international awards for her publications
and teaching. She is currently working on several research and
business engagement projects, including SME financing and
crowdfunding, international entrepreneurship, ethnic entrepre-
neurship, networking, and social capital of family business.
How to cite this article: Zhao Y, Harris P, Lam W.
Crowdfunding industry—History, development, policies, and
potential issues. J Public Affairs. 2019;19:e1921. https://doi.
org/10.1002/pa.1921
COMMENTARY 9of9
