Crowdfunding: Definitions, Foundations and Framework

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 sometimes credited to be one of the top 10 innovations of the twenty-first century. This chapter 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 supporters/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 the context of previously discussed theories. The benefits of government participation in crowdfunding projects include increasing trust in projects, improving information and increasing transparency related to projects, and reducing project risk.