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Crowdfunding: the threat for bankers

James Eyers (AFR) | March 27, 2013

Crowdfunding: the threat for bankers

ASIC commissioner Greg Tanzer, who has been monitoring the crowdfunding market for the past year, says that based on overseas experience the potential for fraud on pledge and reward sites is real and, when it occurs, it is “extremely damaging for investor confidence in the market affected by it”. Photo: Paul Jones

Soon after he was elected last year, Campbell Newman, looking for easy budget cuts, scrapped the Queensland Premier's Literary Awards. Within a week, the Facebook page set up by the arts community to save the awards had more than 1000 supporters. Realising its strong grassroots following, the literati then turned to crowdfunding website Pozible. Four months later, 358 supporters had pledged $29,312, about 50 per cent more than was needed to fund the new Queensland Literary Awards independently of the government.

An Australian-based website established by Alan Crabbe and Rick Chen in 2010, Pozible helps projects find capital. So far it has facilitated about $8 million worth of fund-raising.

Crowdfunding is a recent phenomenon that may define the future of capital raising for entrepreneurs and small businesses. The model is simple and has become possible with the arrival of social media and connected online networks. Those seeking capital post a description and a fund-raising target on a crowdfunding website, where sponsors pledge small amounts to help the project take flight. It's an all-or-nothing system: if a project fails to reach its target, pledged amounts are cancelled. Rewards are typically offered to attract support.

This is known as "pledge" crowd-funding, but raising equity through these platforms is also on the cards, forcing bankers to consider yet another threat to their position as capital intermediaries.

The genesis of crowdfunding is crowd-sourcing, where the small online contributions of many people further a larger goal, such as creating comprehensive encyclopedia Wikipedia or computer operating system Linux.

Now, however, the online crowd - which is becoming increasingly sophisticated as networks of friends and professional colleagues circulate ideas in niche areas - is being harnessed by artists and capital-starved small businesses and entrepreneurs, liberating them from constraints imposed by their traditional lenders.

 

As The New Yorker contributor James Surowiecki argued in his 2004 book, The Wisdom of Crowds, groups can often make better decisions than individuals.

And for innovators unable to win support for projects from banks or angel investors, crowdfunding is a more democratic forum for floating ideas and raising early stage capital.

The movement is attracting the attention of those entrusted to oversee more traditional capital-raising forums. NYSE Euronext chief executive Duncan Niederauer raised it at the CGI America conference last June.

 

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