Crowdfunding industry—History, development, policies, and potential issues

DOIhttp://doi.org/10.1002/pa.1921
AuthorWing Lam,Phil Harris,Ying Zhao
Date01 February 2019
Published date01 February 2019
COMMENTARY
Crowdfunding industryHistory, development, policies, and
potential issues
Ying Zhao |Phil Harris |Wing Lam
Business Research Institute, University of
Chester, Chester, UK
Correspondence
Phil Harris, Business Research Institute,
University of Chester, Chester, UK.
Email: p.harris@chester.ac.uk
Crowdfunding has gained a great deal of attention from policy makers, researchers,
and practitioners. This paper attempts to provide an overview of the history and
development of the industry and discusses different types of crowdfunding and their
public policies. It is identified that the operation of peertopeer lending and equity
based crowdfunding is regulated by the Financial Authority; the rewardbased
crowdfunding (RBC) and donationbased crowdfunding (DBC) is yet to be regulated,
neither in the United Kingdom or United States. The lack of rules and regulations in
the latter two models highlights the burning issues such as potential fraud and mal-
practice. Therefore, we suggest that it is timely to consider regulating the two types
of crowdfunding possibly by governance mechanism with reporting requirements to
keep track of the fund and to provide timely information. Additionally, it is advisable
that practitioners to work on an agreed framework to establish industry standard, so
potential investors can compare and assess the quality of projects easily. Finally, the
management of crowdfunding platforms especially the RBC and DBC platforms
should be improved. The ease of launching campaigns has made it difficult for both
initiators and investors to succeed in the crowdfunding process. Further research to
develop some form of assessment framework would be useful to both parties.
1|BACKGROUND AND RATIONALE
Entrepreneurship as the lifeblood of economy is widely recognised
(Global Entrepreneurship Monitor, 2018). Among the many areas
related to entrepreneurship, access to finance has become an
institutionalised topic in terms of public policy and small and
mediumsized enterprises (SMEs) research (Crosetto & Regner, 2018;
Korosteleva & Mickiewicz, 2011; Mason & Harrison, 2000). However,
studies repeatedly suggest that the funding gap is unlikely to be
narrowed due to asymmetry of information and expectations: entre-
preneurs believe that they can somehow make a profit, but the inves-
tors (and lenders) do not(Bhidé, 2003, p. 39). The consequence, as
observed by Bygrave et al. (2003, p. 113), is that many entrepreneurs
waste a lot of valuable time by prematurely seeking seed capital from
business angels and even from formal venture capitalistssearches
that come up emptyhanded almost every time. In fact, the reality is
that demand for finance will always outweigh supply by a huge mar-
gin, and no government has the resource to address the funding gap
(Lam, 2010; Owen & Mason, 2017). Indeed, despite the selfreported
successof efforts to fill the funding gap over the last few years, the
proportion of SMEs gaining finance through formal, external sources
remains very low. The latest report from the Bank of England shows
that lending to SMEs in the United Kingdom has contracted since
2012 (British Broadcasting Corporation, 2014). Also, a report by the
Department of Business, Innovation and Skills (BIS) suggest that less
than 50% of the SMEs utilise any form of external source of finance
(including credit cards and overdrafts); only 11% of those SMEs use
bank loans (including commercial mortgage) and between 1% and 2%
attempt to obtain equity finance (Department for Business, Innovation
and Skills, 2012). These findings highlight the issue of financing from
supply and demand sides and challenge the government's dispropor-
tionate attention to encouraging greater supply of finance available
to SMEs. Putting aside the issue of affordability, even if there were
sufficient resources, demandside constraints related to SMEs and
new ventures make it inefficient, if not unjustifiable, to use public
resources for this purpose (North, Baldock, & Ekanem, 2010). Such
DOI: 10.1002/pa.1921
J Public Affairs. 2019;19:e1921.
https://doi.org/10.1002/pa.1921
© 2019 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of9

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