Crowdfunding is a fast growing financing and investment alternative. Primarily four different forms of crowdfunding can be distinguished, namely donation- based, reward-based, lending-based and equity-based crowdfunding. These forms differ significantly in terms of requirements, costs, return and legal restrictions. Each form also entails its benefits, challenges and risks. Entrepreneurs can benefit from a large pool of potential capital, easy access, a reduction of geographical barriers, low costs and a huge support network. However, they need to keep administrative and marketing challenges as well as the exposure of intellectual property in mind. Investors are able to diversify their investment within a large amount of business opportunities and concurrently minimize their default risk through several small contributions. Nevertheless, investors should be aware of the high risks involved in investing in start-up businesses, such as information asymmetries, business failure and fulfillment risks as well as potential fraud.
