What is a crowdfunding platform for?

A crowdfunding platform is a “crowdfunding service provider” through a publicly accessible web portal. This is the summary of the legal definition given by the ECSP Regulation, European legislation that has wrought some havoc in the world of equity and lending crowdfunding platforms. The regulation has tightened the obligations and increased the requirements for platforms, without changing their substantive role; rather, it has reaffirmed the perimeter of their activities, helping to clarify some rather widespread misunderstandings among companies interested in crowdfunding.

It is precisely for the benefit of all companies planning to approach crowdfunding that we want to address this article to explain once and for all what a crowdfunding platform is for--and what it is NOT for.

What is a crowdfunding platform

Let's start with the basics. A crowdfunding platform is a legal entity that provides a service through a specially implemented computer system accessible to anyone from the Web.

Equity and lending crowdfunding platforms, in particular, because they handle economic transactions that qualify as financial investments, must apply for authorization to operate from the appropriate authority-in Italy, Consob-and comply with a series of rules and requirements that we will see later. In the article we will focus specifically on these two categories of platforms.

These portals offer companies an infrastructure to launch a crowdfunding campaign and raise capital, to investors a catalog of proposals for investment in said companies. A crowdfunding platform, therefore, matches a supply and demand for capital according to the rules set by financial authorities.

The succinct answer to the question “what is a crowdfunding platform for?” is this: to enable capital raising and crowdfunding investment in a controlled manner, under the auspices of financial authorities and with procedures that protect investors and ensure transparency.

Reward and donation crowdfunding platforms are not subject to specific regulations, so they have fewer obligations and procedures to comply with, but their brokerage and support role is similar.

The main role of a crowdfunding platform: selection

In chronological order, the first task performed by a crowdfunding platform is the selection of proposals from companies to identify those with good potential for success in the campaign and good prospects for future development, as well as economic and entrepreneurial credibility.

A crowdfunding platform, in fact, by regulation must have systems for evaluating the projects it proposes from the perspective of transparency, credit risk, value of companies, ROI, etc. Moreover, it is in its interest to propose quality investment offers to users, so as to generate trust and build a good reputation. A special team of analysts takes care of such assessments based on the documentation received from the companies themselves, their financial statements, and externally collected information.

That is why it is very important for a company to carefully prepare its application: we have devoted an article to tips for passing the selection of a crowdfunding platform.

Building an online crowdfunding campaign page

Once proposals have been selected for inclusion in its showcase, a crowdfunding platform must guide companies in building a campaign page that is transparent, comprehensive, and engaging.

The platform's task is to make sure that investors access all basic and legally required information about the campaign: business plan, company data and contact information, risk class and interest rate (for lending crowdfunding), share types and pre-money valuation (for equity crowdfunding), risks, rights and obligations associated with the investment, payment and remuneration arrangements, and timing.

The company must produce all the materials required by the platform and also prepare a pitch, which is an engaging presentation to welcome potential investors to the campaign page and interest them enough to then go to all the documentation. The platform usually provides guidelines and practical advice for making this presentation, and in some cases offers the support of a team member for drafting. Inevitable then is the pre-publication review, aimed at checking the accuracy of the writing and the absence of incorrect information.

Finally, on the page of an online crowdfunding campaign, one can find a section dedicated to updates: the campaign manager or marketing managers of the platform are in charge of putting in the campaign-related news communicated by the company and any press review.

Each platform has its own template for crowdfunding campaigns, to be filled with content related to each company in a collaborative effort with them.

The support of the crowdfunding platform during the campaign

For an entrepreneur who wants to do crowdfunding, it is important to be clear about the role of a crowdfunding platform during the campaign itself.

Below are the activities that the platform performs for the company:

• monitoring campaign progress
• general strategic advice and guidelines to support the company's independently developed communication plan for its campaign 
• advice on course changes or mistakes to avoid
• updating the news section of the campaign page
• sending newsletters to their user database with information about all current campaigns
• check and resolution of any technical problems.

Crucial then is the role of customer service toward users, i.e., potential investors, which consists mainly of the following activities:

• responding to inquiries about the individual campaign or crowdfunding in general
• provide support in the practical steps to be taken on the portal to enroll, fill out the skills verification questionnaire, and finalize investments
• check and solve any technical problems
• collect and resolve any complaints
• apply the right of withdrawal.

It can be understood from these lists of activities that the role of the platform is primarily one of intermediation and support. It is time, therefore, to clear the air of a misunderstanding that has generated discontent and disappointment in so many companies.

What a crowdfunding platform does NOT do

Crowdfunding platforms do not do crowdfunding campaigns; they enable companies to do them. A crowdfunding platform's database of users is heterogeneous and generic and mostly includes people who have signed up with the portal to invest in a very specific campaign, about which they have been informed elsewhere, either by the company itself or by word of mouth generated by it.

Few sign up to invest generically in crowdfunding and periodically consult the available proposals to decide which to invest in based only on the information on each campaign page.

It is then up to the company to create an audience of potential investors outside the platform and bring them onto the platform. To find out how, read here!

Especially since, by law, crowdfunding service providers cannot:

• Accepting “remuneration, discounts, or nonmonetary benefits for the activity of channeling investors' orders to a particular crowdfunding offering”
• Participate in any crowdfunding offerings on their platform
• Make marketing communications that devote “disproportionate attention to individual projects or crowdfunding offerings that are planned, pending, or ongoing.”

(Source: Regolamento ECSP)

This means that crowdfunding platforms cannot sponsor individual campaigns in a particular way or provide one company with more support than others. They can talk about campaigns on their own channels, but giving space to all of them (even in different communications). They can partner with outside marketing agencies, which offer their services for a fee to crowdfunding companies, which choose whether or not to use them.

The only exception is for portals that also offer portfolio management services to investors, but in this case the very model of crowdfunding we are talking about changes: the portal collects the user's investment needs and criteria and based on them selects the most suitable crowdfunding campaigns.

What about after the campaign? Capital flow management and reporting

After the campaign, the platform's role is to produce reporting on the operation for both the company and investors and monitor the management of the capital raised. Depending on the type of platform, this role may be more or less extensive:

• crowdfunding service providers that directly handle payment transactions deposit funds with a bank or other authorized lending institution and verify the release of funds at the end of the campaign, in case of success and after the completion of paperwork; they also verify compliance with the amortization schedule by companies that have carried out a lending crowdfunding campaign.
• crowdfunding service providers that rely on third-party payment service providers delegate to the latter the management just described and are responsible for verifying compliance with the amortization schedule by companies that have carried out a lending crowdfunding campaign.

In any case, platforms never hold money directly. Even in this respect, their role is only intermediary and serves to secure the rights of companies, on the one hand, and investors, on the other.