LONDON Crowdfunding websites helped companies and individuals worldwide raise $2.7 billion from members of the public in 2012, an 81 percent increase on the previous year, data showed on Monday.
As banks rein in lending due to tougher capital rules and greater regulatory scrutiny, crowdfunding, which originated in the United States as a way to raise money for creative projects, has expanded rapidly as an alternative source of finance.
Many websites now offer small investors the opportunity to earn interest from lending money either to individuals or small businesses, while others allow people to invest as little as 10 pounds ($15) in companies in return for an equity stake.
Interest in crowdfunding exploded after President Barack Obama signed the Jumpstart our Business Startups, or JOBS, act a year ago to legalize equity crowdfunding, subject to new rules being agreed by regulators.
The market is growing, though it still pales in comparison to bank lending to small-and-medium-sized firms, which in the UK alone stood at 28.7 billion pounds ($43.4 billion) in the first nine months of 2012 according to Bank of England data.
Worldwide crowdfunding volumes reached $2.66 billion in 2012, up from $1.47 billion the previous year, according to a survey by Massolution, a research and advisory firm specializing in the sector. That followed growth of 64 percent in 2011.
Massolution predicted $5.1 billion would be raised via crowdfunding platforms in 2013, with a greater shift towards funding new businesses and small firms rather than social projects, which are currently the most popular category.
North America accounts for the bulk of activity, with $1.6 billion raised there last year, a 105 percent increase on 2011.
One of the most highly publicized crowdfunded deals last year saw smartwatch maker Pebble Technology raise more than $10 million through U.S. site Kickstarter, 100 times its target.
Sites seeking donations for charity or funding for creative projects in return for non-financial rewards - such as merchandise, access to computer games, or autographed albums - raised a total of $1.4 billion, Massolution said.
Funds raised by lending sites increased 111 percent to $1.2 billion, while equity crowdfunding, the growth of which has been limited by regulation governing selling shares to the public, was the smallest chunk, providing $116 million.
As crowdfunding is relatively new, there is no data yet on failure rates or average returns on equity investments.
"It can be difficult to make returns investing in early stage businesses, but crowdfunding adds flexibility as it opens companies up to a broader base of investors who may not be investing solely for a return," said Liam Collins, policy advisor at Nesta, a charity which promotes innovation.
Offering investors "rewards" on top of equity stakes can ease the pressure on companies to deliver returns, Collins added. Generous tax breaks in Britain for investing in seed stage firms also make equity crowdfunding an attractive option.
There is no Europe-wide regulation in place specific to crowdfunding websites and the United States is in the process of drafting rules that would govern the sector.
Massolution estimates there are 813 crowdfunding platforms worldwide, either already active or planning to launch.
Wall Street's industry-funded watchdog, the Financial Industry Regulatory Authority, is working with the Securities and Exchange Commission (SEC) to draft crowdfunding rules and has asked websites to voluntarily register with it as a first step.
The SEC needs to adopt rules before small businesses can sell securities to investors through crowdfunding.
"Equity crowdfunding has tons of potential but how regulators interpret it will be a big issue," said Collins. "You will see a step change in the growth once regulation is introduced in the United States."
Britain is also looking at how best to regulate the sector. Two equity crowdfunding sites, Crowdcube and Seedrs, have already been approved by the financial regulator, while lending sites will be regulated from April next year.
(Reporting by Kylie MacLellan; Editing by Rosalind Russell and Clelia Oziel)