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Key features of Investment-Based Crowdfunding
Investment-based crowdfunding represents a departure from traditional forms of finance by leveraging internet platforms to facilitate direct connections between SMEs in need of capital and a diverse pool of retail investors. Unlike donation-based or reward-based crowdfunding, which primarily involve individuals contributing funds in exchange for non-financial rewards or products, investment-based crowdfunding enables investors to acquire equity stakes or debt instruments in the issuing / borrowing SME. The basic premise behind crowdfunding is to enable small businesses to reach out to a large number of potential investors and offer investments in their companies.
The defining features of investment-based crowdfunding include:
1
Internet Platform-Based:
Investment-based crowdfunding platforms serve as intermediaries, providing online marketplaces where SMEs can present their investment opportunities and investors can browse and select projects to fund. This digital platform enables efficient and accessible capital allocation, transcending geographical barriers and traditional financial intermediaries.
2
Securities-based Debt (or profit share) and Equity Finance:
Investment-based crowdfunding offers both debt / profit share and equity financing options to SMEs. Debt-based crowdfunding involves investors lending funds to SMEs in exchange for repayment with interest or share of profit, while equity-based crowdfunding involves investors acquiring ownership stakes in SMEs, often in the form of shares or convertible securities.
3
Retail Investor Participation:
Unlike traditional venture capital or angel investing, which typically involve accredited investors, investment-based crowdfunding democratizes access to investment opportunities by allowing retail investors—individuals without significant wealth or institutional affiliations—to participate in funding SMEs. This broadens the investor base and diversifies sources of capital for SMEs.
