What is crowdfunding?
Financing is the main factor to materialize an idea or project. Often the latter do not even get started due to lack of resources. One of the options that can compensate for this factor is crowdfunding or micro-patronage. This is a strategy that allows you to raise funds through the web in order to finance a project. Instead of relying on large investors or financial or banking institutions, crowdfunding raises small sums of money from a multitude of people interested in providing support.
If "crowdfunding" is translated literally from the English language, it will be clear that it is composed of two words: crowd which means "crowd" and funding, funds. With this we have a meaning, through this mechanism the funds will be obtained by means of a crowd. At this point the question arises: how does crowdfunding work, which will be detailed below.
Once the concept is clear, a better understanding of how it works will be easy. Since many people will decide to support the project financially, it should be organized and promoted. Generally, to promote the idea, communication tools are used, here social networks are the most important. It is important to share ideas with passion, determination and clarity, since the objective is to convince the audience. Sharing photographs, prototypes and calendars will also affirm that the money donated will be used for the proposed purpose. The collaboration will be done through money transfers, through platforms that have been created for this activity.
Crowdfunding in Ecuadorian legislation
Not long ago this activity was regulated in Ecuador. In 2020 the Organic Law of Entrepreneurship and Innovation introduced this new legal figure with the aim of regulating companies that offer the use of crowdfunding platforms. The law states that, like any other commercial company, the companies offering these services will be under the registration and control of the Superintendency of Companies, Securities and Insurance.
The Ecuadorian crowdfunding model has a particularity: it requires mandatory cooperation with the country's financial system. This is because the platform, when intervening by receiving money, inevitably becomes a financial intermediation entity. Another feature that stands out in Ecuador is that the collections have a maximum ceiling, i.e. there is a limit, unlike the platforms registered in other countries. The maximum fundraising amount per project within crowdfunding platforms is 1,000 basic unified salaries (SBU).
Finally, the law proposes a ban, not for crowdfunding platforms, but for their users. In this sense, a project cannot be funded at the same time on more than one crowdfunding platform. The following paragraphs will describe the advantages and disadvantages of participating in crowdfunding.
Advantages of crowdfunding
First of all, this financing model offers entrepreneurs, creators and individuals an alternative way to obtain funds without incurring significant debt or having to assign or sell a substantial part of their assets. By accessing a broad base of contributors, projects can receive funding without relying on traditional investors, giving them greater independence and control over their initiatives.
The collaborative fund can help mitigate legal risks by involving the community in the financing process. By providing transparency to sponsors, creators can build a relationship of trust that can be beneficial in the event of legal disputes. In short, crowdfunding not only offers an efficient way to obtain financing, but can also contribute to building a solid structure for the project.
Disadvantages of crowdfunding
Undoubtedly, the biggest disadvantage of crowdfunding is not for the platforms and much less for the users, but for the State. This last statement is given because, on many occasions, crowdfunding has been the ideal medium for money laundering or money laundering, due to the confidentiality of the donors. This is why Ecuador has set a maximum amount of money that users of crowdfunding platforms can receive.
In summary, crowdfunding offers an accessible way to finance ideas and projects, but it also entails legal and regulatory situations that require careful planning and proper advice. While providing significant opportunities, users must be mindful of the risks and commit to sound business, fair and legal practices to ensure the long-term success of their initiatives.
If you need legal assistance regarding crowdfunding, do not hesitate to contact one of our professionals. You can write to us at ace@iurenovum.com or call us at 0990938575 or 0990552880. We will be happy to help you.
