You have a great idea! For example, a product you have developed, or maybe a cause you feel is worth raising charitable donations for. However, you cannot seem to raise the necessary funds through conventional sources. What do you do?\nGiving up is one option, but another option that has become increasingly popular is crowdfunding. And, given the more than $34 billion funding volume it generated in 2015, crowdfunding is a topic definitely worth talking about.\nWhat is crowdfunding?\nAs the name suggests, this is the process of raising funds from a large pool of people. The basic concept is simple: a start-up company needs funds and perhaps wants to test the waters for whatever product or concept it is passionate about and offering. Donors, on the other hand, simply want a reward. This could take the form of an investment return, some form of patronage, or just a general desire for social participation. Crowdfunding appears to be a mechanism whereby all these objectives are met, and therefore it is not surprising this funding model has become a growing trend.\nHow does crowdfunding work?\nCrowdfunding consists of presenting an idea on a crowdfunding platform (such as Kickstarter or Indiegogo). Essentially, people and businesses use the Internet to promote their projects and/or ideas to obtain funds through a web portal. The basic premise behind crowdfunding platforms is that you are able to raise a large amount of money by reaching a large pool of investors, with each investor usually donating a small sum of money.\nAside from securing funds, these platforms provide many other benefits, such as:\n\n early validation of a product or concept\n free marketing and/or public relations\n early access to a loyal customer base\n\nMore importantly, many have found that a crowdfunding platform accompanied by an appropriate crowdfunding model (see below) enables fairly rapid penetration of local and international markets. Products and concepts launched in this way have gained take-up at exceptional rates.\nWhat are some common crowdfunding models?\nVarious crowdfunding models exist. In 2015, most crowdfunding campaigns fell into one of the following buckets:\n\n Social/donation: e.g. Entities raise funds to build, sell or distribute their product.\n Pre-purchase/reward: e.g. An individual provides a product sample in return for a donation.\n Peer-to-peer lending: e.g. The issuing company offers low-interest debt securities.\n Equity securities: e.g. Holders obtain an equity stake in a non-publicly traded company.\n\nWhat is the effect of crowdfunding on financial reporting?\nFor entities that have already engaged in a crowdfunding campaign, or are considering one, there are some key questions you need to consider if you have to report financial information to stakeholders. These questions have started to raise some unique issues when it comes to financial reporting and, in doing so, have sparked the interest of various parties including securities regulators and, of course, business owners themselves.\nWhat are some financial reporting implications?\nAs described above, entities can undertake a number of different types of crowdfunding campaigns that range from a simple donation (without any financial return) to more complex models that involve the entity issuing debt or equity-based instruments.\nAs we know, understanding the underlying economics is essential in identifying the specific financial reporting implications and how they should be accounted for. Some initial questions to consider are:\n\n What type of entity received the payment (that is, a charity, not-for-profit, individual, other)?\n What, if anything, did the entity promise to give back to the funds provider?\n\nReflecting on the following questions may help you uncover some of the pressure points you may need to consider when working through the financial reporting implications in a particular fact pattern.\nSocial/donation\nWhat happens if not enough money is raised? What obligations does the entity have if the product is not completed or the model fails? What sort of right to a refund exists, if any?\nPre-purchase/reward\nDo any multiple element arrangements exist? What are the conditions for satisfying the revenue recognition criteria? What sort of right of return exists, if any? Or, if revenue is to be deferred, at what point and on what basis would it be appropriate to recognize revenue?\nPeer-to-peer lending\nIs the loan interest-bearing? What are the repayment terms and how should the loan be classified on the balance sheet? Are there other commitments or obligations that need to be considered (for example, when product incentives are attached to the debt instrument)?\nEquity securities\nIs the company a publicly accountable entity (PAE)? Which GAAP should they apply? For more information about the PAE as a type of entity, check out the May 2015 IFRS Discussion Group minutes, where this specific issue was discussed.\nThe above list is not exhaustive, but it should get you thinking about why and how crowdfunding has become a hot topic in financial reporting.\nWhat are the securities regulators saying?\nSecurities regulations regarding these types of investments continue to evolve. However, on November 5, 2015, the securities regulators in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia published in final form "Multilateral Instrument “MI 45-108 Crowdfunding," which introduces a crowdfunding prospectus exemption for issuers and a registration framework for funding portals.\nMI 45-108 will require issuers to distribute their securities through a registered funding portal. These funding portals will fulfill certain gatekeeper functions that include reviewing the issuer’s disclosure and obtaining background checks on the issuer and its directors, executive officers, and promoters. \nOn a related note, in May 2015, the Canadian securities regulators released multilateral CSA Notice "NI 45-316 - Start-up Crowdfunding Registration and Prospectus Exemptions." This national instrument also provides guidance for entities that are raising capital in return for an equity-type stake in their business. As a result of this national instrument, certain provinces are providing relief in these securities offerings.\nWhat is the future of crowdfunding?\nClearly, based on the growth and trends evidenced over the last few years, we have entered a new era of social funding, which is not really surprising given the advent of social media, which has changed practically every aspect of our lives. It was only a matter of time before it impacted the financial reporting world as well.\nPotentially, we can expect to see an expansion of crowdfunding and even a retail version of crowdfunding down the road within Canada and in international markets. Suffice it to say that this topic is likely to continue to garner interest — and generate financial reporting questions — in the years to come.