Crowdfunding is one of the most exciting online innovations of the last few years. Suddenly finance has become democratic as ordinary folk can provide finance to lots of different ventures via the web.
I'm most interested in 'equity crowdfunding' which is where people can buy shares in small businesses, often start-ups. For example, City 'superwoman' Nicola Horlick has just raised £150,000 for a new film finance business via a crowdfunding website.
But before I focus on that, I'll quickly run through the other kinds of crowdfunding:
This is the most developed part of the crowdfunding sector. You can lend money to other individuals or businesses via peer-to-peer sites such as Zopa.
The most famous crowdfunding site in the US is probably Kickstarter. It enables people to provide financial support to a wide range of projects – often creative projects such as music or art.
The individuals who provide the finance don't own a stake in the project – they will just receive a reward as a 'thank you' for their support. So, if the project was a new theatrical play, the investors might receive tickets to the first night.
Another option is to fund businesses via debt-based investments such as bonds or debentures.
A good example of a website in this area is Abundance Generation. This site enables ordinary folk to invest in renewable energy projects in the UK.
Now let's move onto sites that enable you to buy shares in small businesses – known as 'equity crowdfunding.'
Two equity crowdfunding sites have been in the news during the last week. The positive news story came from Seedrs when Nicola Horlick raised £150,000 in just 22 hours.
The not-so-positive story was news that a fair-trade soap company called Bubble and Balm had ceased trading. Bubble and Balm was the first company to raise money on the Crowdcube funding website – 82 investors contributed a total of £75,000 for 15% of the business back in 2009.
I think it's important not to get too negative about the Bubble and Balm story. It's inevitable that a large number of companies on crowdfunding sites will either go bust or perform poorly.
If you're going to invest via equity crowdfunding sites, your best bet is probably to spread your money around a large number of investments – some of your investments will then fail, but you'll hope that you'll also have one or two successes, meaning that overall, you'll make a profit.
Let's now look at the different equity sites in more detail:
The site has now successfully raised cash for more than 27 businesses, and as I write, there are 23 businesses looking for investors right now.
Potential investments include Quickcaps, an innovative bicycle security device, and Neardesk, which enables customers to rent desks at locations around the UK. You can invest as little as £10 in a business, so it's easy to build a nice diversified portfolio of start-up businesses.
With Seedrs, you'll never have the right to exercise votes at shareholder meetings and the like. Seedrs peforms all of these functions as a nominee service. Some investors may find it annoying that they have no direct input into the businesses they're funding, but it certainly makes life easier for the businesses that have raised the cash.
Seedrs is regulated by the FCA and seems to be doing well.
This is pretty similar to Seedrs although it only became fully regulated by the FCA earlier this year.
It's now successfully raised more than £10 million of funding for 59 businesses in total. Not all businesses on Crowdcube are start-ups; you'll also find existing businesses that are looking for extra investment to grow.
This is interesting because it facilitates both equity and reward crowdfunding. It's possible that some folk might find this confusing, but the distinction is fairly clearly flagged on the site.
The thing that worries me a little about Crowdbnk is that it currently only has one business on the site looking for equity funding. So some investors may prefer to use Crowdcube or Seedrs where there is more choice.
4. Syndicate Room
It differs from the other equity crowdfunding sites, because the minimum level of investment for each company is much higher at £500.
Syndicate Room works with existing angel investors who have much more available cash than most of us. The idea is that an experienced angel investor will thoroughly check out a business, and then invest a substantial sum as well as providing advice and guidance to the entrepreneurs.
Then further investors will join in via Syndicate Room so that the business can raise all the cash it needs.
The attraction of this model is that you may take comfort from the fact that an experienced angel investor thinks a business has potential. On the other hand, it's harder to spread around your cash across a range of businesses if you have to invest at least £500 in each company.
As I've said the best way to reduce risk is to invest across many businesses, but the FCA appears to becoming increasingly nervous about the risks involved with crowdfunding.
As a result, Seedrs has said that if you haven't invested at least £1,000 in total over your first year - in at least 15 businesses - it will contact you to try to find out why. If you can't satisfy Seedrs on that point, you may not be permitted to make further investments via the Seedrs platform.
Don't get me wrong, there's clearly a real risk that you could lose all your money here. But if that's the case, I don't see why people can't invest a total of £300 across five businesses in the knowledge that losing such a sum won't make a significant difference to their finances.
And anyway, regardless of any regulatory tinkering that may come from the FCA, I'm convinced that equity crowdfunding is here to stay. And it could be a fun way to make a bit of money.