Crowdfunding 101: The Four Types You Need To Know

02 September 2015 Privacy, Cybersecurity & Technology Law Perspectives Blog

This post was originally written by Dylan Rochon, 2015 Foley & Lardner LLP Startup Connector.

The term “crowdfunding” is closely associated with websites such as and These sites provide a platform for startup companies to attract attention and funding. They provide an avenue for a wider group of investors to help fund or completely fund entrepreneurial startup projects. They have become popular among entrepreneurs, allowing them to “test the waters” and launch ideas that may otherwise not have been launched. In 2013, the crowdfunding economy reached $5.1B, more than three times larger than it was in 2011. Crowdfunding is said to be in startup mode itself and is expected to continue rapid expansion.

There are essentially four types of crowdfunding, and each one has its own pros and cons.

Donation Funding. The first and oldest type of crowdfunding is donation funding. This category is mostly made up of social impact organizations with goals such as creating ecofriendly products or bringing clean water to impoverished countries. Funding to these projects takes the form of simple donations, with the reward to the funder being the satisfaction of “doing good.” Gofundme is an example of a donation funding site.

Rewards-Based Funding. The second form of crowdfunding is rewards-based. By far the most popular form of crowdfunding, rewards-based funding allows individuals to pledge however much they want to a project in exchange for gifts or rewards. These gifts range from a t-shirt to (literally) a role in a movie, depending on the funding amount. Rewards-based funding is most popular with tech products. Kickstarter is a prime example of this type of funding.

Debt-Based Funding. The third type is debt-based crowdfunding, also known as “crowd lending,” and is similar to a loan from a bank. However, this “loan” can come from multiple funders, may be more accessible, and often has lower interest rates than banks. Individual lenders are investing in potential company growth in hopes of interest-based returns. This form of funding follows many of the same rules and regulations as equity funding described below and the two are often confused. There are also ways in which these investors can turn their “loan” into common shares. Just like equity funding, a lender is betting on the success of the startup, and there is no guarantee that the lender will see a return. Lending Club is an example of debt-based crowdfunding.

Equity-Based Funding. The final type of crowdfunding and possibly the most interesting form is equity-based. Just as it sounds, equity-based crowdfunding is when individuals invest in equity of a company. This form of funding has been around since the Jumpstart Our Business Startups (JOBS) Act was passed in 2012. The initial set of rules and regulations that allowed “non-accredited” investors to fund companies in exchange for equity were quite strict and many incubators and companies raised concerns about their difficulty. In response, the SEC recently passed Regulation A+ (Reg A+), a ruling that lessens certain compliance burdens on companies and raises permitted funding limits. This new regulation took effect June 19, 2015. While it should make crowdfunding easier, some experienced investors remain skeptical and believe that the regulations remain expensive and troublesome. Check out Angel List for an example of this type of funding.

Time will tell whether and what types of crowdfunding will become successful and established alternatives to traditional forms of early stage financing. One thing is clear: the demand for startup funding remains high, and many investors have shown a willingness to participate in crowdfunding as a new and innovative way to provide their financial support.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services