Crowdfunding 1. Crowdfunding Hunzla S. Zaidi Michigan Islamic Academy

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1 Crowdfunding 1 Crowdfunding Hunzla S. Zaidi Michigan Islamic Academy

2 Crowdfunding 2 Abstract This first section of this paper defines crowdfunding and explores the three different types of crowdfunding: donation crowdfunding, equity crowdfunding, and debt crowdfunding, and provides analysis of each. Next, it lists the benefits followed by rebuttals of the arguments made by the critics of crowdfunding. Then, the paper explores possible risks of crowdfunding as well as how to Islamically approach crowdfunding, followed with the summary of the paper. Keywords: crowdfunding, benefits, risks, critics

3 Crowdfunding 3 Crowdfunding Hunzla S. Zaidi Michigan Islamic Academy As technology evolves, everything adjusts to stay current. In this society, anything one year old becomes obsolete and people are always looking for an update. From new cars to new pencil styles, we see this example all around us. People adopt these new technologies to benefit themselves, their businesses, and people around them. A perfect example of this is crowdfunding: a revolutionary way for businesses, organizations, or even individuals to raise funds for their ideas and projects publicly through the internet. Crowdfunding is a term first coined in 2006 to get users of FaceBook, Twitter, and other social media to fund projects and causes. Before the use of crowdfunding, people would publicly ask their supporters to donate. For example, a singer would ask his/her fans to donate for a new album or a tour that he/she may be attending. Acknowledging the benefit of crowdfunding, many people have created crowdfunding websites to support their ideas or needs, the most popular site being gofundme.com. This website, created by Brad Damphousse and Andrew Ballester in May 2010, is the main website for crowdfunding. Businesses or individuals who need money in a short period of time will make a website and will open it to the public for them to donate. Thousands of people have opened their campaigns to the public and have collectively raised over $120 million since the creation of this website (Ballester, Damphousse, 2010). In addition, the

4 Crowdfunding 4 US government has recognized crowdfunding as playing a very important role in economic growth because it helps more individuals to become consumers and producers without the support of businesses or companies (Gerber, Hui, & Kuo). Fundraising methods have evolved and crowdfunding is being adopted by businesses, organizations, and individuals for its convenient features. There are three different types of crowdfunding. The most common is Donation Crowdfunding. In donation crowdfunding, people donate because they agree with the cause. Small rewards may be offered for donating, but the main reason people donate this way is because they have personal motivation to donate and after donating, they feel a sense of satisfaction and accomplishment. For example, there may be a crowdfunding opportunity to help the homeless in a specific area. One may donate solely for the satisfaction of knowing that they may have impacted a person s life without expecting anything in return. The second type of crowdfunding is Debt Crowdfunding, where people invest money for a cause, and the investors receive money back with interest. This way, businesses and companies can avoid banks and although the investors help financially, they also feel that they supported a cause that they agree with. Debt crowdfunding is most popular with businesses looking to receive a loan to start their business. Lastly, there is Equity Crowdfunding, in which people exchange money for shares in the business or cause. However, in this method, there is a risk of losing all the money invested if the share values plummet. In addition, some crowdfunding websites may ask one to invest their time in helping with the advancement of a specific cause or project if they are not able to assist monetarily (Andrew, 2013).

5 Crowdfunding 5 Regardless of the methods, crowdfunding offers numerous benefits for both donors and donee. The first of these benefits is the reward that donors may receive if they contribute to a certain company s/individual s crowdfunding website. For example, two people had an idea to manufacture a coffee warming product that would be funded through crowdfunding. They raised $306,944 and as an incentive to donate, anybody who donated $40 and above received the product after the fundraising goal was met (Gerber et al., N.D). Also, when donors donate, they can be assimilated with fellow donors, creating a fan base between donors and donee. This fan base can support the company/individual s idea(s) and donors may receive periodic notifications while businesses concurrently earn revenue. Similarly, if a small business has a product they want to promote, and they have customers who are willing to buy it, then the customers can support the business via crowdfunding to help it become popular ( Crowdfunding for Nonprofits, 2011). Crowdfunding results have shown that entrepreneurs are expanding their businesses through crowdfunding. As stated by Chance Barnett, the founder of Crowdfunder (a massive crowdfunding website), Crowdfunding sites generated some $2.8 billion last year, a figure that will soar to $15 billion by 2015 (Diamandis, 2013). This optimistic view is the reason why businesses and organizations are investing money in crowdfunding campaigns. Along with the aforementioned benefits, users of crowdfunding do not have to worry about long or short distance fundraising due to crowdfunding being primarily a social source. According to Ajay Agrawal and co-authors, the mean distance between artist-entrepreneur and

6 Crowdfunding 6 investor is approximately 5,000 km (Agrawal et al., 2011). Lastly, and most importantly, crowdfunding can help create jobs for the unemployed, assisting the struggling economy. Crowdfunder, a crowdfunding website, helps unemployed people by directing them to a specific business or company where their skills can be utilized. Crowdfunder does this by creating a platform where people can engage on that more personal level (Diamandis, 2013). What Diamandis means by more personal level is that Crowdfunder interviews the unemployed and based off their personal interests, skills, and experience, directs them in a direction that will help them come out of unemployment. Regardless of these benefits for both investors and beneficiaries, there are many controversial aspects of crowdfunding. Critics argue that companies who use crowdfunding are weak, meaning they have a negative future outlook (Caldbeck, 2013). Although this may be true for a very small percentage of companies, the rest of the companies have a positive outlook. Companies that are facing tough times turn to crowdfunding to help them bounce back, and the effort is often successful. For example, a man named Shemar Moore wanted to promote his film online through crowdfunding. In one month, he surpassed his goal of raising $500,000 and made $139,000 more than he expected (Iamrogue 2013). This proves to critics that not all companies who use crowdfunding are weak and have a negative outlook, and those who are weak benefit greatly from crowdfunding. In addition to critics stating that companies using crowdfunding are weak, they maintain that companies who use crowdfunding may have confidential information revealed. This is

7 Crowdfunding 7 incorrect, for many companies that utilize crowdfunding make money off the name brand of the product. For example, there are many types of shoes but many people buy Nike because it s popular in society. Another brand can challenge the brand, but ultimately, chances are high that Nike will be more successful. Also, crowdfunding websites are making a private section for companies to put their confidential data in so that other companies do not see the data and the company won t have to worry about confidentiality (Caldbeck, 2013). Along with these concerns, critics also assert that donors are underage people using their parents money to fund projects. However, this is not true as many donors are entrepreneurs with experience of supporting these causes. Lastly, critics proclaim that as a result of crowdfunding being technological, there is a chance of fraud to occur. Therefore, one should ask themselves specific questions before donating to these crowdfunding sites. Firstly, they should ask if there is a system of check and balances to make sure that their money is received by the correct recipient. Then, they should ask if a background check was done on the recipient to make sure that they re not scamming you and stealing your money. These are some ways one can determine whether or not they should send their money to that specific business, organization, or individual (Caldbeck, 2013). Furthermore, critics uphold that traditional fundraising methods trump the methods of crowdfunding. Despite their beliefs, there are numerous reasons why that may be incorrect. Firstly, in traditional fundraising, receiving investments from outside sources may require the business or individual to pay the loaner back. This defeats the purpose of fundraising, for the

8 Crowdfunding 8 donation becomes a loan. In crowdfunding, the business or individual do not have to pay the donors back. Also, many investors are looking to see a result of their donations quickly. In traditional fundraising, the results come slowly, and there isn t an update every time somebody donates. However, in crowdfunding, the results are updated anytime a donation is made. (Steinberg & DeMaria, 2012). Aside from what critics believe, crowdfunding has its risks for both donor and donee. Most start-up businesses raise funds through crowdfunding to promote their product or idea. However, according to Business Insider, 93% of start-up businesses fail because they do not have a solid platform to build their revenue on (Blodget, 2013). This demonstrates that people who donate to these types of businesses have no guarantee that they will receive a reward or any type of incentive. On the other hand, these businesses may startup, but will take a long time doing so; thus, people who donate through equity crowdfunding will have to wait to see their share profit until the business(es) they are supporting reach the stock market, which takes years of success. Also, what many investors don t know is that it is not possible to sell one s shares to another person because it is very difficult to refund the money one donated to the business. Crowdfunding has Islamic risks as well. The traditional means for raising capital for companies, businesses, or individuals involves receiving a loan from a bank that may charge interest. The Holy Quran states in Chapter 2, Verses , Those who devour riba (interest) will not stand except as stands one the Satan has driven to madness by his touch. That is because they have said: Trade is but like riba. But Allah has permitted trade and forbidden riba. So,

9 Crowdfunding 9 whosoever after receiving admonition from his Lord desists, he shall be pardoned for the past, and his case is for Allah (to judge); but one who reverts (to the offence), those are the companions of the fire. They will abide therein (for ever). Allah destroys riba and gives increase for deeds of charity, for Allah loves not any ungrateful/non-believing sinner. Crowdfunding offers an alternative way to raise money without interest. However, of the aforestated methods, Debt Crowdfunding is not allowed in Islam because most of the time there is interest involved. It is reported in a hadith in Sunan of Abu-Dawood, Hadith 3327, Narrated by Abdullah ibn Mas'ud, The Apostle of Allah (peace be upon him) cursed the one who accepted interest, the one who paid it, the witness to it, and the one who recorded it. This clearly displays that we should be careful in avoiding this type of crowdfunding for interest plays a role. In addition, when dealing with Equity Crowdfunding, there is a risk of becoming involved with interest and we shouldn t do anything that can risk us becoming involved in an unlawful act. Therefore, the safest and most profitable method of crowdfunding is Donation Crowdfunding. This is because there is no interest involved and the people who donate do not expect anything in return, helping the host of the crowdfunding site receive funding without having to pay anyone back. All in all, crowdfunding is a relatively new idea that has been recognized by many businesses, organizations, and individuals who are looking for supporters to donate for their idea or endeavors. Although faced with criticism, crowdfunding has several benefits such as supporting growing and established businesses with income, providing the grounds for

10 Crowdfunding 10 researchers to conduct new experiments, and being able to fundraise without having to repay donors. Numerous businesses and individuals have switched from traditional fundraising methods to crowdfunding, acknowledging its usefulness in raising funds through the use of the public.

11 Crowdfunding 11 References Agrawal, A., Catalini, C., & Goldfarb, A. (2011, June 6). Retrieved from AgrawalCataliniGoldfarb.pdf Andrew, A. (2013, June 18). Crowdfunding: what is it and how does it work? This is Money. Retrieved from /Crowdfunding-does-work.html Blodget, H. (2013, May 28). A Startup's Odds Of Success Are Very Low - Business Insider. Retrieved from Damphousse, B., & Ballester, A. (n.d.). Raise Money for YOU! Crowdfunding & Online Fundraising Websites! Retrieved from Diamandis, P. (2013, September 7). Top 5 Benefits of Crowd Funding XPRIZE. Retrieved from Gerber, E., Hui, J., & Kuo, P.Retrieved January 26, 2015, from

12 Crowdfunding 12 Iamrogue (2013, September 10). IAR EXCLUSIVE INTERVIEW: Shemar Moore Talks 'The Bounce Back,' crowdfunding, 'Justice League: War' and 'Criminal Minds' - iamrogue.com. Retrieved January 26, 2013, from exclusive-interview-shemar-moore-talks-the-bounce-back-crowdfunding-justice-league-warand-crimanal-minds.html Steinberg, S., & DeMaria, R. (2012). Retrieved January 26, 2015, from Sunan of Abu-Dawood Hadith 3327 The Quran: (Al-Baqarah 2:271)