What Is Crowdfunding?

Crowdfunding raises small amounts of money from many people, usually online, either as pre-orders and rewards or, in equity crowdfunding, as ownership in the company.

Category: Funding and investors · Reviewed 11 November 2026 · 2 min read

How it works

A company describes its project on a crowdfunding platform and invites the public to contribute. There are several models, and the differences matter legally.

Reward or pre-order: backers receive a product or perk. They get no ownership.
Donation: people give without a return, common for causes and creative work.
Equity: backers buy shares or similar securities. In the US this is regulated, and companies generally must use approved methods such as Regulation Crowdfunding through registered platforms.

Rules, limits and fees change, so confirm current requirements with a securities lawyer before an equity raise.

Example

Suppose a founder designs a travel backpack. She sets a goal of $40,000, offers the pack at a discount to early backers, and promotes the campaign to her audience. If the goal is met, the platform pays out minus fees and she builds the first production run. If the goal is not met, many platforms return the money. Backers own no part of the company.

Why founders care

Crowdfunding can prove demand and build a customer base before you spend heavily. It also demands public marketing work, fulfillment on a deadline and honest communication. An equity campaign adds many small shareholders, which can complicate later fundraising, so discuss it with a lawyer first.

Common mistakes

Launching with no audience, assuming the platform will bring buyers.
Underestimating manufacturing, shipping and platform fee costs.
Promising delivery dates that production cannot meet.
Treating an equity campaign as casual, though it involves securities law.

Frequently asked questions