how to... Crowdfunding for local authorities part of our how to guide series on finance and local economic growth Introduction Crowdfunding has created a frenzy in the business community and the creative sector because of its ability to raise money quickly and flexibly, bypassing traditional sources of finance. But it has yet to become as widely adopted among local authorities. This is in large part down to the fact that councils are rightly cautious about new fads when it comes to handling public money. However, much of this caution comes from confusion about what exactly crowdfunding is, how it can be used in a local government context and how to weigh its risks and benefits. We hope to shed some light on this area so that people working in local government can make informed choices about if and how to get started. There are three main types of crowdfunding: ● Donations-based crowdfunding ● Equity crowdfunding ● Peer-to-peer (P2P) lending These work in different ways that are accessible to different organisations and groups. This guide will help you to unpick the different types of crowdfunding, their uses within and outside local government, and contains practical tips for those who wish to give crowdfunding a try. While this is still new territory for local government, it is cheering to note that crowdfunding is already working well for many councils as we mention throughout the guide. It holds the potential to raise money for local charities and social projects, to earn higher interest on council savings, to plug funding gaps for services and to support local businesses and the economy. These opportunities will be different in each area so we will give ideas rather than instructions. Please note: You must not rely on the information in this guide as an alternative to legal/financial advice from an appropriately qualified professional. What can councils use crowdfunding for? Donations- Equity Peer- based crowdfunding to-peer crowdfunding lending Raising money for the council/ Depends on council services circumstances* No Yes Investing council money in local businesses/social enterprises Yes Yes Yes Investing council money in local charities Yes No No Distributing council money to community projects Yes No No Supporting the local economy by promoting local crowdfunding campaigns run by local businesses/social enterprises Yes Yes No Encouraging individuals and organisations to donate to community projects Yes No No Helping local businesses/social enterprises raise money through crowdfunding Yes Yes Yes Helping community projects to raise money for projects through crowdfunding Yes No No *Crowdfunding involves getting the public excited and engaged enough to support campaigns. If the council was running a campaign asking the public for direct donations, the public would most likely see it as giving the council more money, on top of council tax, and would be turned off by the prospect. 2 LGiU | Crowdfunding for local authorities Who can raise investment/borrow money through crowdfunding platforms? Donations-based Equity Peer-to-peer crowdfunding crowdfunding lending Depends on Local authority circumstances* No Yes Business Yes Yes Yes Social enterprise Yes Yes No Individual Yes No Yes Community project Yes No No Charity Yes No No * As mentioned on the previous page, although local authorities are able to raise money for themselves through donations-based crowdfunding, it may not appeal to the public. These tables are intended to give you an overview of the possibilities attached to each type of crowdfunding. However different platforms operate in different ways. 3 LGiU | Crowdfunding for local authorities Donations-based crowdfunding Platforms include Spacehive, Kickstarter, Indiegogo and Crowdfunder This type of funding involves people donating money towards a project, product or business. Unlike equity or debt funding, investors have no expectation of seeing that money again – it is comparable to donating to charity. A range of people and organisations list on this type of platform – film students, museums, inventors, startups, charities, social enterprises, academics… There is a strong appeal in getting something for (essentially) nothing! Many councils are already using this type of crowdfunding with great success for a variety of purposes. Some say that they have increased community engagement through running crowdfunding projects and are able to direct their support to the things that residents care about most. Instead of the council deciding which organisations need grant funding, the residents can decide themselves. How does it work? A target funding amount is set by the individual or organisation that is raising money, and the campaign is listed online. Anyone can donate – individuals, organisations, local authorities, etc. – and they are able to contribute however much they feel like giving . The organisation must reach its target amount in order to receive any of the money. If the target total is reached by the deadline, the money is taken from those that have pledged; if not, no money is taken at all. The platform acts as an intermediary, handling the money. Sometimes the person or organisation raising money will offer non-monetary rewards for the investment – such as preview screening tickets for a film, one of the first batch of products, keyrings, or your name in the acknowledgements. But for some investors, the satisfaction of having contributed to a worthwhile project or an improvement of their local area is enough. In Nesta’s 2014 report ‘Understanding Alternative Finance’, they found that “when choosing which campaigns to back, more than 60 per cent of backers valued the quality of the idea, the team and knowing their money was making a difference.” Use in local authorities ● Councils can encourage residents to contribute to local projects run by charities, community groups or individuals. They can also use their unique position of influence within the community to convene resource from other stakeholders, and make it available to project creators. Manchester City Council and 16 London Boroughs have done this with the help of Spacehive, a civic crowdfunding platform. Residents, businesses and councils can donate to ideas posted on the website. The public take ownership in delivering projects - reducing the burden on the local authority. ● Councils can leverage their existing funding streams by offering to match funding from the crowd for community projects. Some councils, including Dorset and Plymouth, have partnered with Crowdfunder to attract applications for community projects, with the promise of matched funding from the council if the crowd contributes. ● Councils can also look for ideas about where to put their resources by looking at local projects that have been successfully crowdfunded. This gives the council a good idea of what issues and projects matter to their residents. For instance, in response to Liverpool 4 LGiU | Crowdfunding for local authorities People donate money to a project If the project raises its target funding they believe in, which is listed on a amount it goes ahead. In this case crowdfunding website, eg new play new play equipment is purchased for equipment for their local park local children to enjoy! Sometimes the project organiser will offer non-monetary ‘rewards’ for people who donate money, such as VIP passes to the opening of a film they have funded City Council’s proposal to remove an abandoned flyover, the local community crowdfunded over £40,000 to pay for a feasibility study looking at creating an elevated park instead. Top tips Raising money ● There is little financial risk involved for councils wishing to raise money from the crowd through this type of platform. The main consideration is how the community will respond. Depending on what the council is raising money for it is possible that residents may perceive your fundraising efforts as an additional tax for services they already expect from their council. However if the project is developed alongside the community, you have a much better chance of achieving buy-in to the idea and therefore raising money. ● According to councils that have tried raising money through donations-based crowdfunding, smaller localised projects seem to work well. Encouraging residents to donate to projects that are less fun, accessible or personal, like infrastructure or on- going maintenance costs, is likely to be quite a hard sell. In general, donations-based crowdfunding is good for augmenting existing council spending, but shouldn’t be used to fully replace it for most services. ● It may be preferable to use existing crowdfunding platforms than to design your own. When spending money online, people tend to prefer a familiar site as a reassurance that their money is safe. Moreover, the design of crowdfunding platforms is rapidly evolving to maximise the user experience and maintaining your own to the same standard would be very difficult. 5 LGiU | Crowdfunding for local authorities Investing money ● When donating to a project, or encouraging others to do so, you should do some background research on the individual or organisation behind it to make sure they are credible, contactable and are really doing what they say they are doing. If necessary, ask your financial advisor to conduct due diligence to uncover any past bankruptcies or fraud convictions. ● It’s worth bearing in mind that there is no guarantee that the project will be completed, will be a success or that the people listing it intend to work on it at all. Platforms are trying to crack down on this (for example by requiring those listing on the platform to sign a contract saying they will deliver their project, as Spacehive does) and doing your own research will also help minimise the risk. ● You should take the usual sensible precautions when investing council money into external projects. As with any other type of grant funding, you may wish to offer the money in tranches upon reaching certain milestones, or to ensure that projects commit to delivering defined goals.