Crowdfunding is an idea for people, businesses and charities to raise cash. It works through organizations or individuals who invest in crowdfunding projects in return for a potential reward or profit. Investing this way can be dangerous, so ensure you know what you are doing.
How does crowdfunding work?
If you visit a crowdfunding site, you should be able to get an overview of the projects being pitched. You might need to register with the site in order to view the pitches, to obtain more details, or to invest in a project.
If you find a project you want to invest in, you will need to look for more details. The individual, business or social enterprise that is looking to raise cash should tell you:
- How much it has raised so far
- How much it wants to increase
- How the cash will be utilized
- The share in the business provided
- How long the pitch is open for
- How many people have already invested
- What you will obtain in return for investing
The challenges of crowdfunding
People associate crowdfunding as a free or easy way of making money. It needs a lot of effort to set up a project that backers will perceive as a worthy service. Success is not promised in any case. As crowdfunding opportunities become more and more open and wide, backers will become shrewder with what projects they pick to support.
However, Crowdfunding backers do not know when a crowdfunding activity is legal or trustworthy. Many crowdfunded projects have been discontinued because it was a scam. Regulations do not completely save backers from being scammed or save against projects that end up failing eventually, which means crowdfunding must remain informative and transparent to the community.
Reducing the risks of crowdfunding investments
Only invest cash you can afford to lose. You should invest no more than ten per cent of any cash you are willing to invest in one year.
Before you invest any money using an investment-based crowdfunding platform, must verify the authorization. Reward and donation-based crowdfunding platforms are not regulated by the FCA.
What are the tax advantages of crowdfunding?
There are 2 main schemes which provide tax breaks if you invest in little firms: Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
Both schemes let you offset a ratio of the amount you invest against your tax bill and any revenue are free of tax. But there are conditions; for example, you must keep your investment for the lowest time.
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