Question

Describe and define crowdfunding (sometimes shown as crowd funding). But sure to include the different approaches to crowdfunding, including equity funding.

What are the advantages to the movie producer?

What are the advantages and disadvantages to the potential funder? Include such concepts as asymmetric information and investment risk. (Here is an article - What is information asymmetry.pdf - that may enrich your understanding of the importance of asymmetric information concerns).

Recommend one approach that would be most appropriate for this producer and remember to include the reasons why you selected it.

Answer 1

Crowd funding is funding for a project from a large group of individuals rather than seeking large amount of funds from a few number of investors like the venture capital investors.

the different approaches to crowd funfing are :

• donation based crowd funding
• reward based crowd funding
• equity crowd funding
• debt peer to peer lending
• royalty

the funders in return from the funds invested by them may also get a share in the equity of the company . Investors invest their monye and recive a small share of the compnay in return for their investment.

the movie producer knowing that she may not get a bank loan financing can gather funds from his loyal fan base who are looking to maximize their share of profits. This might be the best route for her to finance the project.

advantages to the investor ;

• the start up companies can be trated as separate asser class and thus provide diversification benefits to the investors in the portfolio.
• the gifts they recieve from the company as part of the pitch, this includes discounts, vouchers.
• they can invest a very small amount when it comes to equity crowd funding

disadvantages:

• Since it is an early stage business it is very risky.They can lose their investment which is also called investment risk.
• Even if they are funded they may not deliver performance.
• there is lack of liquidity and there is a risk of multi year time horizon
• there is less due diligence due the lack of historical data
• lack of dividend income.
• information asymetry: due to limited knowledge to the investors regarding the adverse effects of crowd funidng , crowd funding can sometimes lead to frauds due to the information asmmetry between the crowd investors and the businesses.

the approach that would be most appropriate for this producer is :

equity : it is the best method because it will attract a large number of investors due to the guaranteed reward at the end either in the form of dividends or share in the profits.