Understanding crowdfunding

What is Crowdfunding?
The definition from Forbes.com is “the practice of funding a project or venture by raising many small amounts of money from a large group of people, typically via the Internet.”

It started mainly as a way to solicit small donations for charitable causes and for creative projects such as CD music recording, low-budget movie and book publishing. It has mushroomed in recent years and is now used for a variety of purposes, including raising money to fund project development and business startups. There are more than 600 crowdfunding platforms around the world, with fundraising reaching billions of dollars annually, according to the research firm Massolution.

However, legal issues limit solicitations on most portals to requesting donations. A few portals do facilitate loans and royalty financing and have structured themselves to comply with federal and state lending laws. The site LendingClub, for example, allows members to directly invest in and borrow from each other, with the claim that eliminating the banking middleman means “both sides can win” in the transactions. Selling company stock is prohibited unless the site is specifically geared towards accredited investors as defined by the SEC.