Equity crowdfundingSay no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay Crowdfunding is a collective resource-sharing practice used by organizations that aggregate rather small amounts of capital over a limited period of time from many individuals who share a common interest in a specific idea, project, or business . It is a form of alternative finance that operates via online marketplaces. This type of investment covers a wide variety of sectors and is especially widespread in the United States and Europe. It can be divided into four branches (equity, debt, reward and donation), with the first being considered the most suitable for generating impact opportunities. Equity crowdfunding is the process by which people invest in an early stage unlisted company in exchange for shares in that company. This gives investors the right to receive dividends, make subsequent investments and vote. They can profit if the company does well, but the opposite is also true and they can lose some of their investment. It is usually subject to capital markets and banking regulations and is therefore limited in terms of funding amounts, geography and marketing possibilities, limiting the possibility of impactful initiatives being financed via equity crowdfunding. To receive these investments, a company presents itself on some specific platforms, explaining its objectives and the financial goal to be achieved before the end of the program. If the project is successful, the company gets the profits and moves forward with the business plan, otherwise the investments are not finalized and the investor does not lose his money. Start-ups are increasingly looking for capital, but they need to be attractive to attract the attention of investors, and this can be done through research and analysis on investor preferences, based on their values ​​and commitment. The current total value of equity crowdfunding operations is around $1.7 billion per year, but this type of investment follows a growing trend and this figure is expected to reach $5 billion by 2022. Democratization of capital: the final outcome of the project depends only on a market-driven assessment of the quality of the business plan capital without any effects arising from information asymmetry and exclusivity. System resilience: By expanding the concentration of wealth from traditional financial services to interconnected crowdfunding networks, any future financial shocks can be dissipated through a larger and more defensible footprint. Real rates and prices: Fluctuate based on crowd demand (more realistic) rather than the perceived interest of a few financial experts. Financing diversification: SMEs and investors are able to diversify their financing sources and destinations in terms of both sector and geography. Financial Stability: Crowdfunding generates the possibility for investors to receive a tangible return and this makes it less likely that funding flows will stop. Big data: Crowdfunding platforms are capable of developing real-time Big Data for socio-economic trends and patterns. Cooperation with the public sector could lead to a more efficient allocation of public funds and incentives based on crowd activities. Benefits Risks Entrepreneurs: Reputation management: a single customer, shareholder or competitor could tarnish their reputation through social media and other web channels.Business impact: Crowdfunding platforms should establish a minimum standard of accountabilitysocial and environmental as a value proposition for investors and quality support for entrepreneurs. Investors: Fraud: The crowdfunding space may become an easy target for scammers after the advent of more liberal financial regulatory frameworks. -/overestimates due to false assumptions. Follow-up: Communicating with a large group of disparate stakeholders is difficult, especially if they have equal voting rights. Investor Risk: Acceptable risk in crowdfunding is difficult to monitor. Business impact: Achieving transparency on the allocation of invested funds can be difficult, as crowdfunding targets private markets without standardized reporting systems. Regulations Regulation and legislation should aim to protect investors while stimulating efficiency and transparency. Today, due to the protection of incumbent investors, the regimes exclude a large number of potential investors. Crowdfunding offers new and different opportunities to ensure transparency and protect investors. In Europe, crowdfunding is largely regulated by national legislation, as investors seek to escape the high administrative and financial costs of European legislation, but this fragmentation makes cross-border transactions impossible (or too expensive for SMEs). For this reason, potential investors are currently excluded from crowdfunding opportunities based solely on their geographic location. Challenges for the future Measuring impact: Today, crowdfunding platforms have limited or no monitoring and evaluation activities, and none regarding impact. Investors should ensure that their issuers allocate the funds raised in a socially and environmentally responsible manner. An acceptable solution might lie in due diligence and a light post-investment monitoring process. Ticket size: Some argue that the risks associated with impact investing are greater than those of typical venture capital investments. As a result, there is concern that the impact equity crowdfunding market will be limited by low average ticket sizes. Education: The lack of financial and technological know-how in the social sector is indicative of an education challenge. Additionally, social entrepreneurs will need to be familiar with the Internet and social media to sustain a successful campaign. Protection of social entrepreneurs: Equity crowdfunding platforms will need to establish mechanisms to protect entrepreneurs from excessive financial and reputational risks. Types of Loan Secured Loans Describes a loan where the principle The sum is secured by collateral assets, which can be recovered in the event of default. These usually result in lower interest rates. Assets can be recovered. Activities are necessary first and foremost. Given the need for collateral, secured loans are often seen in the form of mortgages, which can help early-stage social enterprises reduce one of the biggest costs of many businesses: renting premises. Unsecured Loans An unsecured loan is issued without collateral to ensure the lender's repayment. Therefore this type of loan is based on the trust or creditworthiness of the borrower. Due to the higher risk to the lender, a higher interest rate will usually be required. Traditional banks may not be as receptive to unsecured loan requests for social impact investment purposes without a track record of sustainability, i.e. at an early stage. Unsecured loans may be more suitable for increasing your workforce and capitalcirculating, and therefore productivity with the expectation of higher revenues. Considerations: Given that the impact investing market is not yet fully developed, companies seeking early-stage funding may still face uncertainty about when and if they will generate income. This must be taken into consideration when applying for a loan that requires regular interest payments at the initial stage. Given the goal of social impact, lenders may be more lenient on loan terms than the broader business world. In particular, social funders may prioritize impact over financial return compared to major institutional funders. Revenue Sharing Agreement What is a Revenue Sharing Agreement? It allows the investor to raise part of the proceeds from an invested charity or social enterprise. This solution helps those organizations where share capital is not possible due to the legal structure, and also those where debt financing is too expensive. The sale of a revenue shareThe agreement establishes a relationship between buyer and seller, while in a loan we find a relationship between borrower and lender. The risk of the investment is shared between investors and investees and investors are rewarded for the investment made. The investor will decide whether or not to invest based on the likely levels of future revenue streams. This financial instrument guarantees a share of revenues, not profits. The investee is not concerned about profitability, which could lead to zero returns for the investor: there may be incentives to manipulate information just to avoid paying if we consider profit rather than revenue. The risk of a loan is lower than the risk of investing in a Revenue Participation Right: with a loan it is always possible to obtain something in the event of default, whereas with this mechanism it is not possible. Therefore, investors are expected to demand a higher return. Typically, investors expect a target IRR of around 10% and determine the return on expected future cash flows based on this. Revenue Sharing AgreementWhat types of revenue sharing agreements can we find? There are two types: Gross Income Linked Returns: A specific portion of the gross annual income is given to the investor; § Incremental income-related returns: the investor receives a share of gross annual income less limited subsidies and/or annual income above a certain level. In the first typology, if there is already certainty regarding the solidity of the investee, we can consider this agreement as a preferred share; in the case of a startup the approach is closer to equity risk. In the second type, the risk faced by the investor is higher, given that only the income flows deriving from "trading" activities are taken into consideration and/or they obtain returns only above a certain threshold. However, the second type is closer to an equity approach. It is very important that the seller knows his profit margins very well. If margins are not that large, the seller may not be able to cover business expenses due to losing a percentage of revenue over time. Revenue Sharing ArrangementWhat are the benefits over debt and equity, both for social enterprises/charities and for investors? The investor uses gross income to determine the IRR, but it is worth noting that only money from the unrestricted income can be transferred to repay the investment. Those offering grants,who are considered a limited income stream, would not appreciate seeing their money used to pay for these investments. One problem that could arise in the market is potential adverse selection, where there is a great possibility of strong organizations rejecting deals because they consider them too expensive and weak organizations accepting any deal. It is crucial that forecasts are as accurate and realistic as possible, as the IRR depends entirely on it. The margin of error considered by the investor in such forecasts is used to decide how much the IRR should be. Social enterprises and charitable investors The amount paid to the investor (the cost of capital) is linked to income/performance and is not a fixed instalment; Less expensive and faster than raising capital;§ Useful if share capital is not possible.No legal barriers due to the composition of the investee;Given the riskiness of the investment, there is the opportunity to obtain higher returns. Hybrid between grants and loansHybrid security: single financial security that combines two or more different financial instruments. In impact investing it is usually seen as a combination of grants and debt. Grants are given in the form of granted capital which requires no interest payments or repayment at the end of the period. Financing may include some form of interest payments in line with outcome objectives and needs. Most common example: Recoverable grant Definition: Loan that must be repaid only if the invested company achieves a predetermined successful outcome. If the success requirements are not met, this loan is converted into a non-repayable contribution. Some practical examples already implemented: Access Foundation: supports the development of business activities to grow and diversify income. They do this with 2 main programmes: a combination of grants and loans in £45m blended finance, which helps bridge the gap between charities/social enterprises and social investors. The loan fund that includes a grant allows the fund manager to make smaller loans and absorb more risk, or unsecured loans. Provide funding for capacity building and investment readiness programs from the £60 million allocation. Clean Vehicle Assistance Program: Helps reduce income families in California from purchasing electric or hybrid cars. Combine an initial loan down payment grant with monthly installments using fair interest rates. Hybrid Grants and Loans Key challenges for hybrid financing: There is a financing gap in the early stages of growth. Businesses are too small for major commercial investment and too large for philanthropic funding. The prevailing mentality in the financial sector still believes that there are only two different possibilities: capital is given without expecting any positive financial return or there is no repayment of capital. they are not yet ready for these innovative financial instruments. Creating a hybrid financing vehicle or mechanism implies the need to align objectives. Why do we need grants and not just loans when financing SPOs? Grants can be essential in the early and proof-of-concept phase, because entrepreneurs need risk-free incentives to start businesses and expand into a larger market. Grants can be useful for specific purposes, for example when businesses enter a completely unknown market or for well-established businesses when they want large-scale monitoring and evaluation methods to create.