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Crowd-Funding vs IPO

6 October 2011 - News - Editor

The concept of business crowd funding appears to be gaining ground as IPOs continue to be delayed, with a lack of confidence in Wall Street, and the economy in general, being cited as reasons behind the reluctance to launch initial purchase offerings right now. It is estimated that more than three hundred public offerings, including IPOs by high-profile companies such as Zynga and Groupon, have been put on ice this year, with no indication of when that ice is likely to thaw. The combined capital these IPOs are hoping to raise exceeds $180 billion, with more than fifty aiming to raise in the region of $100 million each. In the past, IPOs were the best means for raising funds to expand smaller companies, but with rapid advances in technology in the past two or three years alone, this need no longer be the case. There are alternatives - one of which is crowd funding.

Also referred to as crowd sourced capital, or crowd financing, crowd funding can be used for a number of reasons, such as to raise funds for disaster relief, or generate interest in a cause. It can also be used to raise funds for a startup company, which may be referred to as seed funding or angel investing. Social networks on the internet are seen to be great tools for crowd funding, and with the delays associated with IPOs at this time, analysts believe crowd funding may become a viable alternative for raising additional capital for expansion of existing businesses.

Volatile markets continue to make investors cautious, the reckless abandon with which banks were lending money has been abandoned as they hold on to their cash, and the government appears to have run out of options in their stimulus efforts – all of which impact negatively on Wall Street. While IPOs and going public are unlikely to lose their appeal, crowd funding can prove to be less costly, more efficient and flexible. Using online social networks to source investors, and for investors to discover viable companies to invest in, has resulted in a host of crowd funding facilitators, with the concept working so well, that some companies may choose not to go public at all.

Of course, any ground-breaking concept will have pros and cons. Crowd funding supporters point out that it allows innovative thinking, not restricted by corporate boundaries. One of the main disadvantages of crowd funding is that in order to get investors to buy into the project, ideas need to be made public in some detail, putting the fund-seeker at risk of having the idea stolen. Also, securities laws tend to be complex, and crowd funding participants need to make sure they are not violating any of these laws.

 


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