Crowdfunding FYP - Final Draft

University of Limerick
OLLSCOIL LUIMNIGH
Crowdfunding: “A Potential Game Changer”
Name: Naomi Ní Shé
Student ID: 12130311
Degree Programme: Law Plus
Module Code:LA4052
Supervisor: Ms. Sinead Eaton
Date: 21st April 2016

Name:Naomi Ní Shé
StudentID:12130311
ProjectTitle:Crowdfunding:“A potential game changer”
Supervisor:Ms.SineadEaton
Module Code:LA4052
Word Count:5,858
Date: 21st
April 2016
2
Table of Contents
I. Crowdfunding Defined……………………………………………………3
II. History: Kickstarter Revolution…...…………………………………….…4
III. Preparation and Requirements. ………….………………………………6
IV. RelevantLaws…………………………...…………………………………7
V. Expansion…………………………………………………….……...…......11
VI. Advantages…………………………………………...…………………….15
VII. Disadvantages………………………………………………………………17
VIII. Case studies…………...……………………………...………………….…19
IX. Conclusion………………………………………………………………….21

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
Date: 21st
April 2016
3
I. Crowdfunding Defined
Crowdfunding is a recently developed mechanism for financing1 which allows the public to choose
whether or not they wish to provide finance, usually a small portion, to a specific project in
exchange for shares in a company, a product that business will make or even nothing at all.2 It is
generally online and offers the public the chance to invest in a wide range of projects and
opportunities.3 This collective effort results in one large “fund” created for a specific purpose, but
the rules have been blurred since the practice has expanded to entrepreneurs.4
There are several forms of crowdfunding platforms.5 The most frequently used types of
crowdfunding are profit-sharing schemes which occur when investors are given a share of future
profits and revenue gained by the company in exchange for the capital they have invested in the
company, and securities based crowdfunding which concerns shares or debt securities being
issued.6
‘Crowd Sponsoring’ is a critical way for charitable organisations and community based initiatives
to gain capital.7 It is comprised of two types of crowdfunding, those are (i) donation-based
crowdfunding which allows people who are willing to invest in a project for nothing in return and
(ii) reward-based crowdfunding also known as pre-payment crowdfunding which involves an
exchange for the investment such as a product or service that was created using the funds.8
Other types of crowdfunding such as ‘crowd investing’ and ‘crowd lending’ are slowly becoming
more popular also as a result of the possible financial return for investors.9 Crowd lending involves
an organisation or person lending capital subject to specific terms in the hopes of being repaid the
loan along with interest.10
1 Gerard Ryan , ‘Crowdfunding – An Overview’ (Eversheds.com, 1st August 2014)
http://www.eversheds.com/global/en/what/publications/shownews.page?News=en/ireland/crowdfunding -an-
overview-august-2014 <accessed 03 April 2016>
2Paul Belleflamme et al. ‘Crowdfunding:Tapping the right crowd’ (Journal of Business Venturing: entrepreneurship,
entrepreneurial finance, innovation and regional development, Vol. 29, no. 5, (2014) 585-609
3 Eden Burkett, ‘A Crowdfunding Exemption? Online Investment Crowdfunding and U.S Securities Regulation’ (13
Tenn. J. Bus. L. 63 (2011) , http://trace.tennessee.edu/transactions/vol13/iss1/4 <accessed 9 February 2016>
4 Jonathan Frutkin, ‘Equity Crowdfunding, Transforming Customers into Loyal Owners’ (1st edn, Cricca Funding
LLC, 2013) 7
5 Gerard Ryan, ‘Crowdfunding – An Overview’ (Eversheds.com, 1st August 2014)
http://www.eversheds.com/global/en/what/publications/shownews.page?News=en/ireland/crowdfunding-an-
6 Ibid
7 Ibid
8 Ibid
9 Ibid
10 Ibid

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
Date: 21st
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II. History: Kickstarter Revolution
Crowdfunding was originally formed as a means to support the arts on the Internet so that artists
could raise money for a new album for example.11 It also became popular amongst start-up
companies due to difficulties small to medium sized enterprises (SMEs) have had in obtaining
finance.12
The Securities and Exchange Commission (SEC) released rules relating to crowdfunding in the
US which are to come into effect on May 16th 201613 and which state that crowdfunding
transactions must take place through funding portals under the Securities Act.14 Funding portals
are defined as a ‘crowdfunding intermediary that does not offer investment Mi or
recommendations, or solicit purchases’.15 Kickstarter is a funding portal which provides for project
creators to publicise their projects in the hopes of raising sufficient funding to create the projects.
It allows individuals to invest in worthy causes or business ventures without giving the investors
equity in the company they invest in, nor does it offer loans, only some form of reward for
investors.16 These online platforms act as an intermediary between project creators and investors
in the beginning stages of the project creation.
Kickstarter began in 2002 when Perry Chen wanted to hire two musicians for a jazz fest in New
Orleans but was unable.17 He thought of a plan where he could propose something like this, be
supported by the public and people would only be charged if everybody agreed upon it.18 Chen
later relocated to New York in 2005, where he was originally from.19 While working in a diner,
Chen met Yancey Strickler whom he told about his Kickstarter idea.20 The two attempted to create
Kickstarter but it took time.21 Within that time, they met Charles Adler, the designer and the new
11 Aarti Shahani, ‘When a Kickstartercampaign fails, does anyone get the money back?’ (NPR, 3rd September 2012)
www.npr.org/sections/alltechconsidered/2012/09/03/160505449/when-a-kickstarter-campaign-fails-does-anyone-
get-their-money-back <accessed 02 April 2016>
13 U.S Securities and exchange Commission ‘SEC Adopts Rules to Permit Crowdfunding’ (Sec.Gov, 2015)
https://www.sec.gov/news/pressrelease/2015-249.html <accessed 10 April 2016>
14 s.4(1)(6)(c) Securities Act 1933 as amended in 2012
15 s.3(a)(4) Securities Exchange Act 1943 as amended in 2012
LLC, 2013) 85
17Kickstarter, ‘A Brief History of Kickstarter’ (Kickstarter.com) https://www.kickstarter.com/stories/fiveyears
<accessed 11 April 2016>
18 Ibid
19 Ibid
20 Ibid
21 Ibid

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
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co-founder of Kickstarter, who helped with the work on the site.22 In 2008 Time Magazine
described crowdfunding as “one part social networking and one part capital accumulation.”23
On April 28 2009 Kickstarter was launched with the first project being that of a man who wanted
to make t-shirts and had a goal of $1,000.24 The project failed.25 However, soon after other projects
began to succeed.26 Kickstarter began to expand and so employees were hired and a new office
was bought in New York.27 With about ten employees, Kickstarter organized a film festival on a
rooftop where 1,000 people attended.28 More and more inspired project creators contacted
Kickstarter and by 2011 one million people had backed projects on the site.29 The company
continued to expand and by 2012 the company had roughly thirty employees in a three story
office.30 In February 2012 the project “Double Fine Adventure” was the first project to raise over
$1,000,000 on the site.31 This was quickly followed by many other projects exceeding the same
amount.32 In 2013, the number of employees increased to fifty and the company was becoming
more recognised as famous people began to create projects and it was referred to in the New
Yorker, Grand Theft Auto and the television show Jeopardy.33 By 2014 the team had grown to
seventy and a new office was acquired in Brooklyn allowing it to continue its expansion.34
Since Kickstarter was established, over seven million people have invested over a billion dollars
in various projects ranging from cat calendars to a toy helicopter guided by human brainwaves.35
In 2012 Kickstarter alone raised roughly $320 million from 2.2 million investors.36 The reason for
Kickstarter’s success is the considerable range of areas to choose to create a project in or invest
in.37
Kickstarter in now in Ireland and competing with Fund it, the Irish reigning online investment
22 Ibid
LLC, 2013) 89
24 Kickstarter, ‘A Brief History of Kickstarter’ (Kickstarter.com) https://www.kickstarter.com/stories/fiveyears
25 Ibid
26 Ibid
27 Ibid
28 Ibid
29 Ibid
30 Ibid
31 Ibid
32 Ibid
33 Ibid
34 Ibid
35 Fiona Reddan, ‘What you need to know before you take the plunge with Kickstarter crowdfunding’ (The Irish Times,
27 October 2014) http://www.irishtimes.com/business/what-you-need-to-know-before-you-take-plunge-with-
kickstarter-crowdfunding-1.1975995 <accessed 22 February 2016>
LLC, 2013) 91
37 Ibid

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
Date: 21st
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website.38
III. Preparation and Requirements
According to the chief executive of Galvanic, David Ingram, you must be prepared to work
rigorously for at least six weeks in order to commit to Kickstarter.39 Ironically, in order to raise
money for a project, you also need a large amount of money to prepare and promote your project.40
Fund it recommends three months preparation for the project before the general period of five or
six weeks of campaigning followed by up to three weeks processing and up to as long as two years
for delivery.
In order to crowdfund you must build a community, which websites such as Kickstarter give you
access to and enable you to expand.41 A good example of this is when Galvanic were looking for
investors, they offered those the chance to endorse as low as $1 to show support, $79 to buy the
product or $5,000 to spend three days with the team that created the product. This enabled the
company to create a community that cares about the product enough to endorse in it and offer
helpful feedback.42 Fund it looks for popular people who may have awards or may be of a high
profile or have a high profile product as they generally have the consumers attention already and
have the chance to raise more. Knowing someone who has previously created a project may also
help as they are more inclined to support you.
More than 80% of projects use videos in an effort to stand out from other projects and those that
use gadgets show prototypes of the product as photorealistic renderings are prohibited on
Kickstarter.43 There are several rules which must be met in order to crowdfund on Kickstarter.
Crowdfunding for charity, repayments, memberships, political fundraising or contests are banned
from the site along with products claiming to cure illnesses.44 However, there are fifteen wide-
ranging categories such as technology, journalism, crafts, games and food which roughly 80% of
projects successfully apply through. 45 Similarly to Fund it,46 if the project is successfully funded,
40 Ibid
41 Ibid
42 Ibid
43 Ibid
44 Ibid
45 Ibid
46 Fund It, ‘About Fund It’ (Fundit.ie, 2016) http://fundit.ie/info/about/ <accessed 02 April 2014>

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
Date: 21st
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Kickstarter will charge a five percent fee along with a further three to five percent processing fee
depending on the amount raised.47
Although there is no formula for financial success for projects on Kickstarter,48 the top three tips
that should be taken into consideration when planning to crowdfund are:
1. Prepare well by creating a day-to-day plan and a strong pitch
2. Gather as many contacts as possible, get help from family and friends
3. Do not be discouraged during the process, be prepared and aware of the possibilities of
failure49
IV. Relevant Laws
There is currently no legislation governing crowdfunding in Ireland or at EU level, however, there
are various regulatory frameworks that crowdfunding platforms may have to adhere to.50
Crowdfunding platforms based on investing may fall within the breadth of several scopes such as
banking, investment and payment services regulations governed by legislation such as the Central
Bank Act 1971,51 the European Communities (Payment Services) Regulations 2009,52 the Markets
in Financial Instruments Directive (the MiFID Regulations) 200753 and the Investment
Intermediaries Act 199554 depending on their structure.55
Crowdfunding is not recognised as a distinct means of raising capital under Irish law.56
Authorisation from the Central Bank of Ireland (Central Bank) is required for ‘banking
kickstarter-crowdfunding-1.1975995 <accessed 02 April 2016>
LLC, 2013) 91
49 Doug Monro, Crowdfunding vs VC Money – an entrepreneur’s perspective’ (TheNextWeb.com, August 2015)
http://thenextweb.com/insider/2015/07/31/crowdfunding-vs-vc-money-an-entrepreneurs-perspective/#gref
51 Central Bank Act 1971 http://www.irishstatutebook.ie/eli/1971/act/24/enacted/en/html <accessed 03 April2016>
52European Communities (Payment Services) Regulations 2009
http://www.irishstatutebook.ie/eli/2009/si/383/made/en/pdf <accessed 03 April 2016>
53 Markets in Financial Instruments Directive (the MiFID Regulations) 2007 http://eur-lex.europa.eu/legal-
content/EN/TXT/?qid=1398325978410&uri=CELEX:02004L0039-20110104 <accessed 03 April 2016>
54 Investment Intermediaries Act 1995 http://www.irishstatutebook.ie/eli/1995/act/11/enacted/en/html <accessed 03
April 2016>
55 The European Communities (Payment Services) Regulations 2009
56 Joe Beashel, Review of Crowdfunding Regulation’ (European Crowdfunding Network, October 2013) p.105
http://www.matheson.com/images/uploads/documents/Crowfunding_Regulation_Irish_chapter.PDF <accessed 11
April 2016>

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
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businesses’, those are businesses that focus on taking deposits as a key business that trigger the
necessity for authorisation.57 If the business does not take deposits it does not have to have a bank
license though other licenses may be required.58 Furthermore a crowdfunding platform may be
liable under the Central Bank Act 197159 if they hold themselves out to be a bank, which is
prohibited, so they are limited in the names they can choose for the platform so as not to imply
that it is a banking business.60 Furthermore, a firm may not act or claim to be an investment firm
without authorisation under the MiFiD Regulations.61
A private company limited by shares is prohibited from offering shares, debentures or other
securities (equity or debt) to the public.62 It is worth noting that the Companies Act 2014 states
that those in breach of this may also be liable63 under the Prospectus (Directive 2003/71/EC)
Regulations 2005.64 The aim of this is to prevent consumer damage as soliciting unsophisticated
investors is very risky. If offering shares online was considered to be an ‘offer of securities’ under
the Directive, this form of crowdfunding would not be available to companies unless they issued
a prospectus or availed of an exemption from generating one.65
A crowdfunding platform must have the relevant authorisation, passport or exemption if it acts as
an ‘investment firm’, that is a firm that offers investment services on a professional basis to third
parties.66 These services are regulated by the Investment Intermediaries Act (IIA) and the Markets
in Financial Instruments Directive.67 It is worth noting that under the IIA, offering advice to an
individual on where they should get investment advice will constitute as investment advice.68
57 Ibid
58 Ibid
59 s.7 Central Bank Act 1971
April 2016>
61 Part4 s.7(1)(a) MiFiD Regulations 2007
62 s.68(1)(a) Companies Act 2014 http://www.irishstatutebook.ie/2014/en/act/pub/0038/sec0068.html#sec68
<accessed 03 April2016>
63 s.68(6) Companies Act 2014 http://www.irishstatutebook.ie/2014/en/act/pub/0038/sec0068.html#sec68 <accessed
03 April2016>
64Prospectus (Directive 2003/71/EC) Regulations 2005 (S.I. No. 324 of 2005)
http://www.irishstatutebook.ie/eli/2005/si/324/made/en/print
65Gerard Ryan, ‘Crowdfunding – An Overview’ (Eversheds.com, 1st August 2014)
April 2016>
67 Ibid
68 Ibid

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
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The transmission of money is governed by two statutes in Ireland, those are the European
Communities (Payment Services) Regulations 200969, and Statutory Instrument No. 383 of 200970
(‘PSD Regulations’).71 Those services which are not governed by the PSD may be regulated by
the Central Bank Act 1997 if they fall under the definition of ‘money transmission business’.72
However, platforms may avoid registration for authorisation under the PSD Regulations and the
Central Bank Act by avoiding money transmissions.73 Currently, Irish platforms use the services
of regular payment service providers in order to allow prospective investors transfer funds
themselves, and thus are not required to be regulated to provide payment services.74
Funding platforms have limits on the amount of money that can be invested. Small platforms such
as Fund it have lower limits on the amount that can be invested and investors get a product or ticket
for something rather than shares. In the UK only a certain class of certified clients who have been
advised can invest no more than 10% of their net worth in one year, but there are no limits placed
on professional investors.75 In the US limits placed on investors depend on their financial status,
for example if an individual’s net worth including their income is lower than $40,000 then they
can only invest up to $2,000, but if an individual’s net worth is more than $100,000 then they can
invest 10% of their income. The UK and the US have similar limits with regards to how much can
be invested in one single project, that is 10% of the individual’s portfolio, in order to limit the
impact a failed or fraudulent project would have on the investor.76
According to Andrew Hetherington, the founder of Fund it, it should be noted that Fund it cannot
advise investors whether they should invest in a certain product or not as they are not solicitors,
only a solicitor or an investment firm authorized under the MiFiD Regulations may offer advice.
If the business falls outside of the scope of MiFid then the relevant European Economic Area
(EEA) state laws should be considered before offering advice incase separate regulation and
authorisation of that business is necessary.77 Fund it has their own solicitors who are present until
project managers launch their projects and deal directly with investors themselves, then the project
managers should have their own solicitors. Similarly, proposals by the SEC in the US to prohibit
69 European Communities (Payment Services) Regulations 2009
70 Statutory Instrument No. 383 of 200970 (‘PSD Regulations’)
April 2016>
72 Ibid
73 Ibid
74 Ibid
75 Gary A Gabison, ‘Understanding Crowdfunding and its Regulations’ (European Commission JRC Science and
Policy Report 2015) p. 23 http://publications.jrc.ec.europa.eu/repository/bitstream/JRC92482/lbna26992enn.pdf
76 Ibid
77 Financial Conduct Authority, ‘Factsheet – Investment advisers’ (FCA.org.uk)
https://www.fca.org.uk/static/documents/factsheets/fs025-passporting.pdf<accessed 20 April 2016>

Name:Naomi Ní Shé
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funding portals from giving investment advice or making recommendations have been approved
and will come into effect on May 16th 2016.78
As a result of the expansion of crowdfunding the Central Bank, who is considered to be the relevant
authority to draft papers regarding crowdfunding, issued a consumer information notice on 17 June
2014 in order to inform consumers of the risks associated with crowdfunding investments
indicating that crowdfunding is not a regulated activity in Ireland as of yet.79 The notice further
stated that protections such as the Central Bank’s code of conduct, the Deposit Guarantee Scheme
along with the Investor Compensation Company Limited scheme are not available to
crowdfunding platforms.80
Kickstarter states that if a legal dispute arises with the platform, the dispute is governed in New
York under New York State laws and the laws of the United States and will not apply the Uniform
Computer Information Transaction Act or the United Nations Convention of Control for
International Sale of Goods nor will it give effect to principles of conflicts of law.81 The site states
that by using it, one agrees that any legal or equitable action in relation to or arising from the terms
or use of Kickstarter will only be filed in the State or Federal Courts of New York.82 It further
states that one agrees to submit to the personal jurisdiction of the courts in the case of litigation or
similar actions and waives their right to have a trial by jury in any action, proceeding or any
dispute.83
In the UK, most foreign investments are not regulated except for investments in sensitive areas
such as banking and financial services.84 In considering whether the investment constitutes a
banking of financial service the type of crowdfunding used must be considered. Two types of non-
financial types of crowdfunding are; donation-based, which involves investing without return and
reward-based, which is investing for a thank you or a result of the project.85 The two forms of
financial crowdfunding are; lending-based which concerns the borrowing of money from a group
of people which is later repaid with interest, and equity-based crowdfunding which is generally
used by start-ups and concerns the gathering of investment from a group of people who often get
78 U.S Secutiries and Exchange Commission, ‘SEC Adopts Rules to Permit Crowdfunding’ (Sec.gov,November 2015)
https://www.sec.gov/news/pressrelease/2015-249.html <accessed 03 April 2016>
79Gerard Ryan, ‘Crowdfunding – An Overview’ (Eversheds.com, 1st August 2014)
80 Ibid
81Kickstarter, Terms of Use (Kickstarter.com, October 19 2014) https://www.kickstarter.com/terms-of-use <accessed
20 April 2016>
82 Ibid
83 Ibid
84 Herbert Smith, ‘A legal guide to investing in the UK for foreign investors’ (4th edn, Herbert Smith, July 2012) 3
http://www.herbertsmithfreehills.com/-/media/HS/L050712154578912171416219.pdf <accessed 20 April 2016>
85 WSBI-ESBG, ‘The Crowdfunding Phenomenon and Opportunities for Banks’(Savings-Banks.com)
http://www.savings-banks.com/experience/Pages/Crowd-funding.aspx <accessed 20 April 2016>

Name:Naomi Ní Shé
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shares or dividends as a result.86 CrowdCube is the world’s fits equity finance platform and is
based in the UK.87 and therefore are regulated in the UK by the Financial Conduct Authority
(FCA).88 Foreign investors are advised to have an understanding of the rules of EC competition
law and sector-specific policies.89
There is not a great deal of cross-border investments on Irish platforms even though there are no
restrictions and it is not geo-blocked. However, according to Andrew Hetherington cross-border
investments will be governed by the consumer regulations in the country where the project exists.
If a crowdfunding platform partakes in a ‘banking business’ it must inform the European
Commission of any difficulties encountered when providing investment services or activities in a
third country.90
V. Expansion
Barack Obama stated in 2012 that “Crowdfunding is a potential game changer”.91 It has been
increasing in popularity despite many people still being completely unaware of the scheme. The
increase in the use of crowdfunding may be a result of the decline in lending by creditors
subsequent to the economic crisis coupled with the growth of digitalization of many day-to-day
services.92
Crowdfunding has been around for hundreds of years and was used to for the printing of books in
the seventeenth century, UK parks which were crowdfunded in the nineteenth century and a
number of Bollywood films were also crowdfunded in the 1970’s.93 The most basic and every-
day-example which has been done for years is churches who raise money at mass for the upkeep
of the church.94
86 Ibid
87 Ibid
88 Jason Pope, A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable
securitiesby other media) (Financial Conduct Authority, February 2015)
https://www.fca.org.uk/static/documents/crowdfunding-review.pdf <accessed 20 April 2016>
89 Herbert Smith, ‘A legal guide to investing in the UK for foreign investors’ (4th edn, Herbert Smith, July 2012) 3
http://www.herbertsmithfreehills.com/-/media/HS/L050712154578912171416219.pdf <accessed 20 April 2016>
90 Part5 s.42(1) MiFiD 2007
LLC, 2013) 15
93 BBC News, The Statue of Liberty and America’s crowdfunding pioneer’ (BBC.com, 25 April 2013)
http://www.bbc.com/news/magazine-21932675 <accessed 10 April 2016>
94 Alison Partridge, ‘Crowdfunding City Futures?’ (URBACT, 01 July 2015) http://urbact.eu/crowdfunding-city-
futures <accessed 10 April 2016>

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
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In July 2013 the Independent noted that the three crowdfunding platforms based in Ireland are
Linked Finance in Dublin which lends to small businesses instead of them borrowing from the
banks, Fund it, ran by Business to Arts, a non-profit organization95 which is also in Dublin and
allows worldwide followers, fans and friends invest in artists with creative ideas and Seed Ups in
Donegal which gives tech start-ups and investors the chance to raise capital where they may have
failed using the traditional methods.96
Previously, a project could not be set up using an Irish bank account.97 Therefore, Irish companies
used Kickstarter though UK and US platforms for years before the Irish platform was established
last year.98 For example, in 2013 Galvanic became the first Irish company to raise over $100,000
through Kickstarter for its Pip product which measures stress.99
People all over the world can invest in a project through Kickstarter, subject to capital movement
restrictions outside the EU for example. However only individuals in certain countries may create
a project as of yet.100 Those countries include: Ireland, The United States, The United Kingdom,
Canada, Australia, New Zealand, the Netherlands, Denmark, Norway, Sweden, Germany, France,
Spain, Italy, Austria, Belgium, Switzerland, and Luxembourg.101
The highest rate of success is generally with dance projects (68%), closely followed by theatre
(63%) then music (54%), and finally journalism (29%), technology (27%) and fashion (27%)
having surprisingly low success rates.102
While considering developments overseas, it is evident that crowdfunding is expanding as more
countries are introducing relevant regulations. ‘Crowdfunding and the Promotion of Non-Readily
Realisable Securities Instrument 2014’ was implemented in the UK by the Financial Conduct
Authority (FCA) on 1st April 2014 in order to safeguard investors who lack essential knowledge
95 Fund It, ‘About Fund It’ (Fundit.ie, 2016) http://fundit.ie/about/ <accessed 03 April 2014>
96 Independent.ie, ‘Crowd-funding companies in Ireland' (Independent.ie, 14 July 2013)
http://www.independent.ie/lifestyle/crowdfunding-companies-in-ireland-29417104.html <accessed 19 February
2016>
98 Ibid
99 Ibid
100 Kickstarter.com, 'Who can use Kickstarter' (Help Center, Kickstarter.com)
https://www.kickstarter.com/help/search?utf8=&term=other+countries <accessed 23 February 2016>
101 Ibid
102 Fiona Reddan, ‘What you need to know before you take the plunge with Kickstarter crowdfunding’ (The Irish
Times, 27 October 2014) http://www.irishtimes.com/business/what-you-need-to-know-before-you-take-plunge-with-

Name:Naomi Ní Shé
StudentID:12130311
Module Code:LA4052
Word Count:5,858
Date: 21st
April 2016
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in the area while also encouraging competition.103 Furthermore the FCA introduced “operating an
electric system in relation to lending” in relation to crowd lending which falls under core FCA
provisions and principles such as client money protection rules; minimum capital requirements;
conduct of business rules including promotions and disclosure; dispute resolution rules and also
the prerequisite that reasonable steps must be taken in order to confirm that current loans will be
carried out if the company collapses.104
Another requirement under the rules is that in order to ensure loan-based crowdfunding platforms
monetary resources must not be less than the rules stipulate, they must conform with the basic
solvency requirement.105 In addition, the FCA also imposed further requirements on unlisted
securities as they considered them to be riskier and should only be offered to professional clients,
advised retail clients or those classified as corporate finance or venture capital contacts, retail
clients who will not invest over ten percent of their net investable capital in unlisted equity and
debt security, or retail clients qualified as sophisticated or high net worth investors .106
The situation regarding crowdfunding in Europe also demonstrates how this method of investment
is expanding. In 2013 alone it was estimated that crowdfunding platforms in Europe raised roughly
€1 billion.107 As a result of the expansion, the European Commission published the communication
‘Unleashing the Potential of Crowdfunding in the European Union on the 27th of March 2014
which focused on the Commission’s concerns such as highlighting crowdfunding and informing
the public about it, calculating regulatory developments made at national level and considering the
necessity of regulatory intervention at EU level.108 In addition, the Commission also initiated the
European Crowdfunding Stakeholders Forum which offers advice to the Commission, enhances
policies and examines the possible creation of a ‘quality label’ for crowdfunding platforms.109
The United States has, of course, made further developments. Todd Lippiatt, the Managing
Principal at Aristone Reality Capital, who spent ten years working on Wall Street is of the
impression that crowdfunding could change Wall Street.110 This led him to launch the
crowdfunding website Propellr.com which he believes is more suited to crowdfunding as he aims
to create a funding platform consisting of finance experts as opposed to technophiles which he
104 Ibid
105 Ibid
106 Ibid
107 Ibid
108 Ibid
109 Ibid
110 Louis Bedigian, ‘How Crowdfunding Will Change Wall Street’ (benzinga.com, January 22 2014)
http://www.benzinga.com/general/entrepreneurship/14/01/4243441/how-crowdfunding-will-change-wall-street

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believes will be a major step forward in the crowdfunding industry.111 The Jumpstart Our Business
Start-ups (JOBS) Act was enacted in 2012 which sought to lessen the regulatory hurdles in relation
to crowd investing in America.112 However, it did assign certain responsibilities on funding portals
such as the requirement to research companies listed on the site, register with the SEC, control
financial transactions, disclose the risks to investors and provide necessary information to
prospective investors.113 Until Title II of the Act came into effect in 2013, private companies could
only solicit investors who they already had an established relationship with, however the Act now
allows private companies to advertise that they are involved in crowdfunding once they take the
reasonable steps to confirm that the investor is accredited (that the individual has a net worth of
over $1 million excluding the value of their home, or has had an income of over $200,000 in the
previous two years).114
Title III of the JOBS Act was slow to be enacted as there were fears concerning the financial
burden and compliance risks being placed on start-up companies and SME’s.115 However, Title III
was subsequently introduced as a result of the major growth in online crowdfunding along with
the lack of issues with the JOBS Act thus far.116 The expansion of crowdfunding was evident as it
was expected to make $34 billion this year, surpassing Venture Capital, before Title III was even
enacted.117 Title III allows companies raise up to $1 million within one year from unaccredited
investors, (investors who do not meet the net worth requirement under the SEC’s Regulation D to
be accredited investors)118 through crowdfunding but requires that both the funding portal and the
company to meet certain criteria and make certain disclosures to the SEC.119 According to the
securities attorney, Sam Cuzik who is associated with the regulatory and legislative aspects of
crowdfunding, Title III was “great for everyday people who have been shut out from investing to
date” as Title III allows unaccredited investors and everyday citizens enter the market and invest
111 Ibid
LLC, 2013) 133-135
115 Ibid
116 Chance Barnett, ‘SEC Approves Title III of JOBS Act, Equity Crowdfunding with Non-Accrediteds’ (Forbes
Entrepeneurs, October 30 2015) http://www.forbes.com/sites/chancebarnett/2015/10/30/sec-approves-title-iii-of-
jobs-act-equity-crowdfunding-with-non-accredited/#29dee7886535 <accessed 08 April 2016>
117 Ibid
118Investopedia ‘Definition Non- Accredited Investor’: an investorwho has a net worth of less than $1 million with a
spouse and who has earned less than $200,000 per annum, or $300,000 with a spouse in the last two years.
(Investopedia) http://www.investopedia.com/terms/n/nonaccreditedinvestor.asp <accessed 15 April 2016>

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in start-ups, providing startup companies with the opportunity to acquire far more capital.120 This
can be contrasted with Ireland where there are no restrictions on who can or cannot invest through
equity crowdfunding.121 While the JOBS Act provides for private investments to be advertised to
high net worth investors through the internet, Kickstarter stated that it will not allow project
creators offer equity on the site.122
VI. Advantages
Crowdfunding creates long-term relationships between creators and those following the project.123
According to Dr. Richard Swart, the director of research on crowd finance at UC Berkeley,
crowdfunding isn’t just about raising money for large companies, it also provides an opportunity
to “increase social reach and get massive amounts of feedback from customers”.124 This was
evident when Coke launched a crowdfunding campaign to help dig wells after receiving several
complaints about using excessive water at the bottling plants in Mexico.125 Those who successfully
fund through Kickstarter take advantage of the opportunity it offers to connect with backers by
offering insights into their campaigns and attracting attention from the media as was seen when
the creator of the television programme Veronica Mars created a campaign to which he regularly
posted updates to fans who responded by pledging $2.5 million.126
There is a range of crowdfunding methods available as mentioned above. Another form of
crowdfunding is civic crowdfunding which allows communities work together and invest in their
own area to improve the environment in which they live, an example of which was the Eiffel Tower
120 Chance Barnett, ‘SEC Approves Title III of JOBS Act, Equity Crowdfunding with Non-Accrediteds’ (Forbes
Entrepeneurs, October 30 2015) http://www.forbes.com/sites/chancebarnett/2015/10/30/sec-approves-title-iii-of-
jobs-act-equity-crowdfunding-with-non-accredited/#29dee7886535 <accessed 08 April 2016>
121 Claire Lord and Conall Geraghty, ‘Crowdfunding Creativity’ (Mason Hayes & Curran- MHC Times Autumn
2014) http://www.mhc.ie/uploads/00123_-_MHC_CrowdFund.pdf <accessed 20 April 2016>
124 Louis Bedigian, ‘Coke, Microsoft and 3 Other Big Companies That Have Used Crowdfunding’ benzinga.com,
August 25 2014) http://www.benzinga.com/general/crowdsourcing/14/08/4802231/coke -microsoft-and-3-other-big-
companies-that-have-used-crowdfun <accessed 11 April 2016>
125 Ibid

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which was crowdfunded in Paris127 in 1889 as the entrance to the World’s Fair128 and has beena
major attraction for a long time.
Using a platform such as Fund it to crowdfund provides the opportunity to avail of assistance from
local experts in fundraising and cultural and creative industries to aid in the preparation for the
project to be made available to the public.129 Furthermore, small platforms such as Fund it ensure
that each project is ready to crowdfund by studying the campaign and communication plan, testing
the fundability, arranging for the owner of the project to discuss it with a project creator,130 and
ensuring that professional advisors and accountants are available to clarify that you have the means
to go ahead with the project. Furthermore, small platforms are less likely to be litigated against
than large platforms like Kickstarter as less money can be invested due to the limits placed on
them.
Another advantage to using these platforms is that both Kickstarter131 and Fund it have an ‘all or
nothing’ attitude and charge no fee unless projects meet their targets within the campaign time
allotted to them, so unlike equity investing, creators of a crowdfunded projected keep all ownership
and control over the project regardless of the amount of money raised.132 This was evident when
Kickstarter got nothing when Oculus Rift used the platform to raise $2.4 million for a virtual reality
headset in 2012 and Facebook later paid $2 billion in stocks and cash to purchase the company.133
Had Kickstarter gone against its principles and traded the headset for stock in the company they
would have earned $43,500 but that is not how they operate.134
Using an Irish platform such as Fund It can also be of great advantage as the funds raised remain
in Ireland and one fifth of funds pledged to the site come from abroad which brings capital to the
creative sector.135
127 Alison Partridge, ‘Crowdfunding City Futures?’ (URBACT, 01 July 2015) http://urbact.eu/crowdfunding-city-
futures <accessed 10 April 2016>
128 Michael Howes ‘Anyone for crowdfunding? (Tayabali Tomlin, 13 December 2013)
http://www.tayabalitomlin.com/anyone-crowdfunding/ <accessed 15 April 2016>
130 Ibid
134 Ibid

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VII. Disadvantages
Crowdfunding involves a lot of hard work from preparation to pitches, crucial meetings, phone
calls and interactions with prospective investors.136 It also involves a lot of emotion as potential
investors back out, fears of failure, and online trolling by competitors who attempt to acquire your
confidential plans.137
Ingram notes that projects which have not secured outside investment prior to selling their product
on Kickstarter may not succeed as they are unlikely to raise the cost of manufacturing the product
through crowdfunding alone.138
Although over 70,000 projects have succeeded through the use of Kickstarter, the website has a
failure rate of roughly 60%,139 a huge factor one must consider when deciding whether or not to
launch a project through the use of crowdfunding. An example of this is Paula Rowan, who in
2013 created a project which she hoped would raise £30,000 for her glove company but failed
miserably when only 21 investors endorsed £1,751 in the project.140 She believes the project failed
as it was not ‘exciting enough’ and the social media campaign surrounding it was not strong
enough for her stiff competition with ‘media friendly projects’.141 In contrast to this however, it is
important to note that using a site of smaller-scale such as Fund it allows for less chance of failure
as the site claims to be amongst the most successful reward-based sites worldwide and has a
consistent success rate above 71%.142
Furthermore, if a project fails, Kickstarter’s policy notes that the creator of the project must refund
investors, however there is no procedure on the website which allows for this, as was seen with
David Barnett who refunded forty out of 500 investors for an iPhone case project that failed.143 An
even worse case was that of ZionEyez (later named Zeyez due to the association of the name
ZionEyez’s with failure) where Joe Taylor, an experienced entrepreneur who worked with a multi-
137 Ibid
139 Ibid
140 Ibid
141 Ibid
143 Aarti Shahani, ‘When a Kickstarter campaign fails, does anyone get the money back?’ (NPR, 3rd September 2012)
http://www.npr.org/sections/alltechconsidered/2012/09/03/160505449/when-a-kickstarter-campaign-fails-does-
anyone-get-their-money-back <accessed 06 March 2016>

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million dollar firm that created mobile video recorders, created a Kickstarter campaign to create
glasses with digital functions.144 The project succeeded tremendously however as a result of the
number of investors owed a pair of the glasses, manufacturing and shipment issues quickly
arose.145 ZionEyes struggled to meet demands and investors became furious and began
complaining online.146 Joe Taylor later disappeared, founders names were removed from the
Kickstarter page, no updates were published and nobody received the product nor were they
refunded.147 It is worth noting that the spokesman of the company stated that “some of the people
who utilize Kickstarter don’t understand what it’s all about”, the point being that the aim of
Kickstarter is to aid projects in the beginning stages, not to launch a company into extensive
production.148 Another commentator noted that “backers are not backing companies, they are
backing ideas about things that might be possible to do or make”.149 However, the fact that Joe
Taylor simply disappeared and made no effort to reimburse the investors at all shows the risk
attached to crowdfunding on a large funding portal which does not enforce refunds to investors
who have lost out.
In comparing crowdfunding to Venture Capital, a firm that gives funding to a start-up company in
exchange for equity in the company,150 some may opt for Venture Capital as there is less of a
burden to build your brand, there is more of a chance of success and it is more sophisticated.151
Venture Capital may be regarded as a better route for companies who are looking to gain
investment exceeding five million euro, who are in need of connections as they cannot raise 50-
75% from their own network.152 Despite this, the healthy competition Venture Capital offers
crowdfunding may encourage further developments.
VIII. Case Studies
Despite the failed cases above which should be considered in order to avoid the same mistakes and
learn from, there have also been some very interesting successful crowdfunding stories considered
below which also offer guidance.
LLC, 2013) 100-101
145 Ibid
146 Ibid
LLC, 2013) 102-103
148 Ibid
149 Ibid
150 Venture Capital Definition http://www.businessdictionary.com/definition/venture-capital.html <accessed 08 April
2016>
152 Ibid

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The Statue of Liberty
Not many are aware that the pedestal for the Statue of Liberty was crowdfunded through a
newspaper campaign which led to donations from hundreds of people while it was being shipped
from France to New York.153 The French government paid for the statue as it was a gift to the US,
however the US had to raise $250,000 (roughly $6.3 million in today’s currency) for granite
plinth.154 The American Committee of the Statute of Liberty was given the job of raising the money
which they failed to do by about a third.155 The New York Governor refused to use city funds to
cover the costs and Congress were unable to agree on a funding package.156 In the meantime,
Baltimore, Boston, Philadelphia and San Francisco offered to cover the costs if the statue would
be relocated.157 Eventually Joseph Pulitzer, a well know publisher launched a fundraising
campaign in his newspaper The New York World.158 160,000 people of all ages and classes backed
the project and more than 75% of the pledges were less then a dollar.159 The goal of $100,000 was
surpassed in five months and the surplus of $1,091 was given to the sculptor as a gift.160 The
campaign was similar to the way crowdfunding operates today, the newspaper was the only
collection point and agent of the project and funds were raised from a large pool of investors,
rewards were offered such as gold coins, and the money was raised very quickly through small
donations.161 The success of the campaign for the Statue of Liberty led to a number of well-known
campaigns and the newspaper subsequently raised capital for a memorial to Ulysses Grant, a Civil
War General and President of the US and also launched a campaign for tax reform.162
The Pebble wristwatch
Eric Migicovsky created a project for a watch that he connected to his Blackberry and could view
his text messages on.163 After a failed attempt to attract investment through Y-Combinator, a firm
that helps technology start-up founders, he turned to Kickstarter in early 2012.164 He offered email
updates as a reward for investing and a Pebble watch for the first 200 investors who pledged $99
154 Ibid
155 Ibid
156 Ibid
157 Ibid
158 Ibid
159 Ibid
160 Ibid
161 Ibid
162 Ibid
LLC, 2013) 84
LLC, 2013) 85

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which cost subsequent investors $155 and which sells for $150.165 There was also an effective
video included in the campaign.166 Migicovsky reached his goal of raising $100,000 for his
company Pebble in less than one day, and by the time the campaign closed Pebble had reached a
new record for Kickstarter investments by raising over $10 million in total from 68,929
investors.167 Shortly after, rumours that Apple were creating the apple-watch began to circulate.168
Migicovsky’s project shows that although there may be issues regarding manufacturing and
shipment when more investors buy the product than was originally expected so more of it has to
be created, technophiles are still given the opportunity to bring their ideas to fruition through the
platform by bringing a new class of consulting companies into the market to assist successful
project creators manufacture their products.169 Furthermore, Migicovsky did so well with his first
project he decided to go back to Kickstarter and create a project for Pebble Time, an updated smart
watch in December 2015 which raised $20,338,986 from 78,471 investors.170
Sandra’s Dog Rescue
This is an Irish case which involved Sandra, a woman from Waterford who rescued 39 dogs which
impacted heavily on her finances and led to her being warned that she would be served an eviction
notice if she could not pay her dues171 by the end of February 2016 meaning that she will have to
rehome some of the dogs or some may be put to sleep due to their ages.172 Although Sandra updated
her GoFundMe profile one month ago thanking those who have donated, she has only raised less
than half of the €5,000 she aimed to raise and made no comment regarding the eviction notice
which was to be served in late February. Despite this the case has attracted the attention of lots of
people and the photos of the dogs she published on her GoFundMe page has clearly tugged on
people’s heartstrings worldwide as is evident from the comment section where inquiries regarding
investing from the US were made along with requests for more photos of the dogs.
LLC, 2013) 86
166 Ibid
LLC, 2013) 86-87
168 Ibid
LLC, 2013) 88
170Pebble Technology, ‘Pebble Time – Awesome Smartwatch,No Compromises’ (Kickstarter.com December 15 2015)
https://www.kickstarter.com/projects/597507018/pebble-time-awesome-smartwatch-no-compromises <accessed 10
April 2016>
171 Cianan Brennan, ‘Waterford woman and her 39 dogs fighting eviction with crowdfunding campaign’ (The
Journal.ie, February 24th 2016) http://www.thejournal.ie/gofundme-waterford-dogs-2620625-
Feb2016/?utm_source=shortlink <accessed 09 April 2016)
172Sandra A Hennessy, ‘Sandra’s Dog Rescue’ (GoFundMe, February 11 2016)
https://www.gofundme.com/nuva3cp8 <accessed 09 April 2016>

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IX. Conclusion
As a result of technological developments, the expansion of enterprises and new methods of
financing offering investors, funders and supporters the opportunity to gain social benefits,173 the
use of crowdfunding has grown tremendously and it is likely to continue doing so. Although
crowdfunding has been around for a long time, the internet has catapulted it into a major funding
industry.174 However, the risks above should be considered as they may determine any future
developments of crowdfunding.175
It is evident that the method of acquiring finances through online crowdfunding is quickly
expanding as an alternative route to traditional methods.176 It is evolving along with new
challenges particularly with regards to regulatory issues.177 Crowdfunding platforms in Ireland can
lend without the requirement for regulation as long as the platform avoids offering investment and
payment services,178 although it has been recommended that specific legislation regulating
crowdfunding platforms be enacted at an EU level by the EU Commission179 and also in Ireland
as the current situation requires the platforms to continually determine whether the work they are
engaged in comes under existing financial regulatory frameworks180 that are designed for other
business models.181
173 Mónika Kuti – Gábor Madarász, ‘Crowdfunding’ (Public Finance Quarterly, March 2014) p363
https://www.asz.hu/storage/files/files/public-finance-quarterly-
articles/2014/a_kutim_madaraszg_2014_3.pdf?download=true <accessed 10 April 2016>
175 Mónika Kuti – Gábor Madarász, ‘Crowdfunding’ (Public Finance Quarterly, March 2014) p363
articles/2014/a_kutim_madaraszg_2014_3.pdf?download=true <accessed 10 April 2016>
177 Richard Harrison, ‘Crowdfunding and the revitalisation ofthe early stage risk capitalmarket:catalystor chimera?’
(Venture Capital – An International Journalof Entrepreneurial Finance 2013, Volume 14, Number 4, Routledge Taylor
& Francis Group, 12 November 2013) pp.283-287
http://www.tandfonline.com/doi/pdf/10.1080/13691066.2013.852331 <accessed 10 April 2016>l
April 2016>
179 Ibid
April 2016>

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Jonathan Frutkin, ‘Equity Crowdfunding, Transforming Customers into Loyal Owners’ (1st edn,
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Eden Burkett, ‘A Crowdfunding Exemption? Online Investment Crowdfunding and U.S
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Name:Naomi Ní Shé
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Michael Howes ‘Anyone for crowdfunding? (Tayabali Tomlin, 13 December 2013)
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BBC News, The Statue of Liberty and America’s crowdfunding pioneer’ (BBC.com, 25 April
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December 15 2015)
https://www.kickstarter.com/projects/597507018/pebble-time-awesome-smartwatch-no-
compromises
Cianan Brennan, ‘Waterford woman and her 39 dogs fighting eviction with crowdfunding
campaign’ (The Journal.ie, February 24th 2016)
http://www.thejournal.ie/gofundme-waterford-dogs-2620625-Feb2016/?utm_source=shortlink
Sandra A Hennessy, ‘Sandra’s Dog Rescue’ (GoFundMe, February 11 2016)
https://www.gofundme.com/nuva3cp8
Mónika Kuti – Gábor Madarász, ‘Crowdfunding’ (Public Finance Quarterly, March 2014) p363
articles/2014/a_kutim_madaraszg_2014_3.pdf?download=true
Richard Harrison, ‘Crowdfunding and the revitalisation of the early stage risk capital market:
catalyst or chimera?’ (Venture Capital – An International Journal of Entrepreneurial Finance
2013, Volume 14, Number 4, Routledge Taylor & Francis Group, 12 November 2013) pp.283-
287
http://www.tandfonline.com/doi/pdf/10.1080/13691066.2013.852331
Legislation:

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Security Exchange Act 1934 (as amended in 2012 USA)
Securities Act 1933 (as amended in 2012 USA)
Central Bank Act 1971
Statutory Instrument No. 383 of 20091 (‘PSD Regulations’)
European Communities (Payment Services) Regulations 2009
Investment Services Act 1995
Markets in Financial Instruments Directive (MiFID Regulations) 2007
Investment Intermediaries Act 1995
Companies Act 2014
Prospectus (Directive 2003/71/EC) Regulations 2005 (S.I. No. 324 of 2005)
Jumpstart Our Business Start-ups (JOBS) Act (USA)

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