What is crowdfunding? How it works, types and risks

Crowdfunding is a way of raising money from many people at once, usually through a website called a crowdfunding platform, instead of from one bank or one large investor. Depending on the type, the people who put in money get nothing back, a reward, a share of the company or their money back with interest.

What crowdfunding means

The idea is old: many small contributions add up to one large sum. What changed is the internet. A platform puts a project in front of thousands of people, checks the project owner to some degree, collects the money and passes it on when the target is reached.

The difference from a bank loan is who carries the risk. A bank lends its own money and decides alone. In crowdfunding the money comes straight from the crowd, and each person who joins decides for themselves and carries the loss if the project fails. The platform sits in the middle: it chooses which projects to show, writes the paperwork and handles the payments, but it does not usually guarantee the outcome.

The word covers two very different things. Donation and reward crowdfunding raise money for a cause or a product, and the backer does not expect a financial return. Investment crowdfunding (often called crowdinvesting) raises money for businesses and property, and the investor expects to be paid back, with interest or a share of the profits. Most of this guide is about the second kind.

How crowdfunding works, step by step

1. The project owner applies. A company, a property developer, an energy project or a creator asks a platform to list its project and says how much it needs.
2. The platform checks it. Investment platforms look at the business, its accounts and any security. How deep this check goes differs a lot from one platform to the next.
3. The offer goes online. The page shows the target amount, the term, the interest rate or the share price, and the risks. In the EU, investment offers come with a key investment information sheet of at most six A4 pages.
4. The crowd commits money. Each person chooses how much to put in, often from a small minimum. If the target is not reached by the deadline, the money usually goes back.
5. The money is paid out and the project runs. Lenders receive interest and repayments on a schedule; shareholders wait for dividends or a sale of the company; reward backers receive their product.

The main types of crowdfunding

The type decides what you get for your money and how you can lose it. These are the forms you will meet on European platforms.

Each type has its own platforms. Startnext is a reward and donation platform for creative and social projects. Crowdcube lists equity offers from startups and growing companies. Mintos is a marketplace for investing in loans. Enerfip funds renewable energy projects.

Loans are by far the largest part of the market. Of the money raised through EU crowdfunding providers in 2024, 58% went into loan-based projects, 23% into debt securities and 12% into equity. More than 10,000 loan-based projects were offered that year.

How investors earn money, and how they lose it

With a loan, the return is the interest. It is fixed in advance, but it is only paid if the borrower pays. When a borrower is late or defaults, repayments stop, and whatever is recovered from any security can take months or years and may not cover the whole loan.

With equity, there is no fixed return at all. You own a small part of a young company. Most such companies never pay a dividend; the gain, if there is one, comes when the company is bought or listed, often after many years. Many startups fail, and then the shares are worth nothing.

With rewards and donations, you are not investing. A reward project can fail to deliver, and there is usually no way to get the money back.

How crowdfunding is regulated in Europe

Since 10 November 2021, investment crowdfunding in the EU falls under one law, the European Crowdfunding Service Providers Regulation (Regulation (EU) 2020/1503). Platforms that worked under national rules before had until 10 November 2023 to get an authorisation under it. The European Securities and Markets Authority (ESMA) keeps a public register of authorised providers; by the end of 2024, 229 providers had that status.

The regulation covers offers of up to €5 million per project owner over 12 months. Larger offers fall under other rules. For investors who are not classed as sophisticated, it sets these protections:

• An entry knowledge test before the first investment, to check that you understand the risks.
• A simulation of your ability to bear loss, set at 10% of your net worth, based on your income, assets and commitments.
• A risk warning and your explicit consent when you put more than €1,000 or 5% of your net worth, whichever is higher, into a single offer.
• A reflection period of four calendar days, during which you can withdraw your commitment without giving a reason.
• A key investment information sheet for every offer, of at most six A4 pages.

The United Kingdom is outside these rules. There, the Financial Conduct Authority regulates loan-based and investment-based crowdfunding, and money put into either is not covered by the Financial Services Compensation Scheme. Donation and reward crowdfunding are not investments and are not regulated in the same way in either the EU or the UK.

Pros and cons for investors

What to check before you invest

1. The licence. In the EU, look for the platform in ESMA's register of crowdfunding service providers; in the UK, in the FCA register.
2. What you actually own. A loan, a bond, a share or a claim through another company: the paperwork decides what happens if things go wrong.
3. The security. Is the loan backed by a mortgage, a pledge or a personal guarantee, and who enforces it? A buyback promise is only as strong as the company that gives it.
4. The track record. How many projects were late or defaulted, and how much was recovered. Platforms in the EU must publish their default rates every year.
5. Fees and the way out. Fees on interest or withdrawals, and whether a secondary market lets you sell before the term ends.
6. How much you put in. Spread small amounts over many projects and platforms, and only use money you can leave untouched for the whole term.

The main risks