Crowdfunding: Definitions, Foundations and Framework

Abstract

Crowdfunding is a form of financing or fundraising where a large number of investors pool their small (typically) individual contributions to support a project offered by an entrepreneurial firm. It is sometime credited to be a top 10 innovation of the 21st century. This paper discusses the basics of crowdfunding. It starts with a description of new innovative terminology related to crowdfunding. Examples include such terms as project founders/originators, project sup-porters/backers, crowdfunding platform etc. It then focuses on the foundations and details of the main types of crowdfunding, which includes reward-based crowdfunding, equity-based crowdfunding, debt-based crowdfunding and donation-based crowdfunding. We then discuss some major theories of crowdfunding including asymmetric information-based and moral hazard-based theories. For each theory, its major implications are presented and compared with available evidence. Particular attention is paid to the basics of crowdfunding in the public sector. We discuss government participation in crowdfunding and its role in light of previously discussed theories. The benefits of government participation in crowdfunding projects include increasing trust in projects, improving information and increasing transparency about projects, and reducing project risk.