• Bruce Kuhlman

    By Dr. Bruce Kuhlman, CFA, CAIA, Full-Time Faculty, Kaplan University
    Published January 2015

    What Is Crowdfunding?

    You have the spark of an idea, but you don’t have enough money to develop it into a finished product. What should you do? Crowdfunding is a fairly recent phenomenon that could be the answer. Mollick describes four noninvestment and investment crowdfunding models:

    • Noninvestment: Nonmonetary rewards. Contributors receive some sort of nonmonetary reward, such as meeting personally with the creators, receiving early versions of the product, having their name listed on movie credits, or a dedication in a book.
    • Noninvestment: Patronage. Contributors expect nothing in return for their contributions. This philanthropic funding is usually related to artistic endeavors.
    • Investment: Equity. Contributors receive ownership in the project proportional to the amount invested.
    • Investment: Debt. As with any loan, the lender expects a return of the borrowed funds as well as a return on the borrowed funds.

    This article provides a brief introduction to the process of crowdfunding, focusing on a very successful Internet crowdfunding intermediary, Kickstarter. Within 5 years of its inception, Kickstarter, a noninvestment crowdfunding portal, had facilitated over 50,000 successful projects. At that time more than 5 million people from around the world had pledged almost $850 million for Kickstarter projects. To date backers have pledged over $1 billion through   

    How Does Kickstarter Facilitate Capital Formation?

    At any given time thousands of hopeful filmmakers, musicians, artists, and designers have their projects listed for funding on Kickstarter. Project creators post their projects and set their own funding goals and deadlines for meeting them. If people around the globe like the idea behind a project, they can use credit and debit cards to pledge money toward its development.

    Is Crowdfunding Regulated?

    There has been much discussion over how crowdfunding should be regulated. Mollick briefly discusses the types of regulations already in place and states that the equity form of crowdfunding is not currently allowed in the United States.
    In 2012 the U.S. government passed the Jumpstart Our Business Startups Act, also known as the JOBS Act. That legislation contains an entire section on crowdfunding. In response to the law’s vagaries and the prospects for further legislation, CrowdFund Intermediary Regulatory Advocates (CFIRA) was established following the signing of the JOBS Act. Formed by crowdfunding intermediaries and experts, CFIRA works with the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA), and other governmental agencies in an effort to establish crowdfunding standards and best practices. 

    Does Kickstarter Make Money?

    Kickstarter receives 5% of every successful project’s funding total. It receives nothing if a project is not successfully funded. For U.S.-based projects, pledges are processed by Amazon Payments. Pledges to non-U.S. projects are processed through third parties, which typically charge 3–5%.

    What Type of Project Can I List on Kickstarter?

    For a project to be listed on Kickstarter, it:

    • must be creative. This includes projects in art, comics, crafts, design, fashion, film, food, journalism, music, photography, publishing, technology, and theater.
    • must actually create something that will be shared with the must be honest. The proposal cannot be misleading. 
    • cannot raise funds for charities or offer financial incentives.

    How Do I Start Using Kickstarter?

    Start by developing a project page. The project page should make your contributors confident by making them feel both that your project is worthwhile and that you are capable of completing it. The page should include a video and a description of the project that clearly communicates what you’re trying to do and why you’re doing it. The video helps potential backers visualize and get excited about your project.
    According to Kickstarter instructions, you should use your video and description to:

    • introduce yourself and any collaborators.
    • share the story behind your project, including progress you’ve made, photos of early prototypes, and research you’ve done. 
    • include a timeline for completing your project and sending out any rewards. 
    • include your budget. 

    Based primarily on project pages, the Kickstarter staff selects what they refer to as Staff Picks. These are projects they particularly like and are featured on the Kickstarter home page.

    What Happens Once My Project Is Funded?

    About 2 weeks after receiving notice that your project has been successfully funded, you can start withdrawing funds. Then, as you develop your project, you should share your progress with your backers. When you are ready to start distributing rewards, Kickstarter will supply you with your backers’ information, such as addresses, shirt sizes, etc.

    What if My Project Is Not Funded?

    If contributions to your project do not reach your funding goal, none of your contributors’ credit cards are charged. You are encouraged to relaunch your project, applying lessons learned from the previous attempted launch.


    Is crowdfunding here to stay? The answer is a resounding yes! By utilizing the Internet, crowdfunding offers the aspiring entrepreneur access to quite literally a world of funding opportunities. 

    Crowdfunding could supplement or even replace friends and family as the first level of funding traditionally sought by entrepreneurs. Before crowdfunding, entrepreneurs often borrowed from family and friends, maxed out their credit cards, and even mortgaged their homes. With today’s technology, entrepreneurs can now reach a wide array of funding sources from the comfort of their living rooms. 

    Of course, there is still the need for hard work. Members of the public will only contribute if you demonstrate you have a well-developed idea and the abilities to push it through to completion.

    There is always the possibility of fraud in any online fundraising endeavor. In response to this acknowledged threat, the U.S. government has begun talks with industry representatives and has proposed legislation. As with any investment-related endeavor, the SEC wants to protect the investor.

    The extent to which crowdfunding will replace traditional funding mechanisms remains uncertain, but the need for startup funds will always exist. To this end, crowdfunding appears to be the future.



    1. Mollick, E. (2014). The Dynamics of Crowdfunding: An Exploratory Study. Journal of Business Venturing, 29, 1-16. 
    2. Kickstarter is an Internet funding platform for creative projects such as films, games, music, art, design, and technology. Kickstarter does not help entrepreneurs raise equity capital. Online crowd funding intermediaries are also called funding portals.

    3. https://www.kickstarter.com/learn?ref=hero.
    4. https://www.kickstarter.com/learn?ref=nav.
    5. IBID
    6. http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf
    7. http://www.cfira.org/about.html. This CFIRA site lists members of the CFIRA Board and the firms they represent.
    8. https://payments.amazon.com/home
    9. For a list of prohibited projects, see https://www.kickstarter.com/rules/prohibited.
    10. https://www.kickstarter.com/help/handbook/your_story.
    11. http://www.sec.gov/rules/proposed/2013/33-9470.pdf
    12. IBID


      Bruce Kuhlman is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University. 



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