Instrument Overview
Crowdinvesting that collects mezzanine or loans from a “crowd” of retail investors, usually via an online platform. Unlike crowd-donation, crowdinvesting collects funds from retail investors who can expect a return on their investment. Hence, it is a type of loan product, where interest needs to be paid. Thus, it is based on lending or reward-based models and investors can freely pledge their capital to projects they wish to support. In principle any project that can raise enough attractiveness can be crowdfunded. The municipalities benefit from community participation, can freely decide on the return on investments and split their finance in regular ways of funding and crowdinvesting. However, the municipality owes responsibility to a large number of small investors and runs the risk that the investors do not stick throughout the funding phase. This type of financing instruments is best suited for small scale investments [1].
Why it matters for cities [2]
- Crowdinvesting has potential to unlock access to finance barriers for young businesses and start ups, thereby helping cities to grow jobs and increase competitiveness.
- Crowdinvesting can help communities to come together to invest in their own spaces and places and / or to improve the environment where they live.
- Some cities are developing their own crowdinvesting platform at city level (or at another geographical level). These bring together different funders and city stakeholders to create a dedicated platform tailored to the local context and often 'match' funding raised.
Key features
- Risk Profile: Suits high-risk, early-stage or community-backed projects.
- Maturity: Ideal for pilots, demos, or gaps in traditional funding.
- Repayment Terms:
- Donation = no return
- Lending = fixed repayment
- Equity = shared returns
- Scalability: Small-scale, replicable; works well with other funding.
How It Works
Crowdinvesting is where a project is financed by raising funds from a large number of people, typically via the internet. There are 3 main types of crowdinvesting [2]:
- Equity based crowdinvesting - the sale of a stake in a business to a number of investors in return for investment
- Loan or debt based crowdinvesting - funds are borrowed from lots of people online rather than from a bank
- Rewards based crowdinvesting - Individuals donate towards a specific project with the expectation of receiving a tangible (non–financial) reward or product at a later date in exchange for their contribution
As well as raising funds, this approach is seen as helping to validate an idea or project and generate enthusiasm amongst the 'crowd' creating valuable advocates and project champions [2].
Benefits & Challenges for Cities [3]
Benefits
- Crowdinvesting can help finance climate-related projects that may be important to a local community but are not attractive to commercial investors due to their small volume.
- Crowdinvesting for climate finance also can help ‘democratise’ climate financing by increasing awareness and encouraging public participation.
Challenges
- Project ownership and continued responsibility for maintenance of a funded asset must be addressed from the outset.
Use Cases
Ghent crowdfunding platform realising climate change adaptation through urban greening, Belgium [4]
Ghent aims at realizing more green areas in response to climate change and actively seeks citizen involvement to achieve this. This is in line with the city being very social and creative with many citizens actively developing bottom-up initiatives. Many of these small-scale projects however have difficulty developing into a successful project through the available financing mechanisms. Therefore, Ghent has developed a crowdfunding platform that allows citizens to propose and finance their ideas for the city.
Two projects addressing climate adaptation have been successfully realized with support of the crowdfunding.gent platform: one project encouraging urban farming and the other one realising edible streets. Although the crowdfunding platform gradually evolved over time towards mainly funding socio-cultural initiatives, it has the potential to be an excellent instrument to realise small projects of climate adaptation that have the opportunity to generate larger ripple effects.
When to Use It
Due to its limited scale and the need to be quite specific in relation to the scope and funding targets, crowdinvesting sources usually finance certain elements of an infrastructure project, such as small-scale feasibility studies, a water supply for a specific small community, or closing a financing gap that would otherwise prevent the realisation of a project (“last-mile” finance). Crowdinvesting can also be used as a debt instrument through the form of mini-bonds, where pooled contributions can be structured effectively as a bond and can provide potential return on crowdsourced investments [3][5].
References
[1] Novikova, A., Stelmakh, K., Hessling, M., Emmrich, J., and Stamo, I. 2017. Guideline on finding a suitable financing model for public lighting investment: Deliverable D.T2.3.3 Best practice guide. Report of the EU-funded project “INTERREG Central Europe CE452 Dynamic Light”, October 2017.
[2] https://urbact.eu/articles/crowdfunding-city-futures
[3] https://citiesclimatefinance.org/financial-instruments/instruments/crowdfunding
[5] EDsd35B78syp19aUcji1Rz37HKMHpsVaNrMODbgy.pdf
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