Crowdfunding currently takes on only one option in North America and most of the world: people can donate money to the cause/project, but cannot "invest" with the expectation of getting anything in return. This makes for-profit projects harder to sell, of course, and often means that expectations from those putting up the projects for crowdfunding need to keep at minimum.
In some parts of the world, though, investors can invest into a share of the business just as venture and angel capitalists do with startups and new ventures. This means that when the company sells, goes public, or is otherwise valued for trade, the investors originally involved can reap the possible rewards.
Recently, the United States passed a law that would allow this sort of crowd investing to happen in the U.S. - Canada is expected to follow suit. Now it's up to the U.S. Securities and Exchange Commission to come up with the rules that would govern this sort of venture investing.
It won't be easy.
=== How the law works.
The SEC's job is to protect investors from scams and dishonest dealers. While we could debate over their track record in this regard, it's what they're mandated to do and it's why the new law, recently signed by the President, is now in their hands to interpret into codified rules. It's not as easy as saying "OK, new business can now let anyone buy stock shares in them." There are tax, market trading, and other rules that have to accompany that under U.S. law.
Here in Canada, things are about the same. Though our laws are generally less complex, commensurate with our smaller markets and population, most of our securities laws are akin to those of our southern neighbours.
The way the new law in the U.S. is written, investors can put up to $2,000 into crowdfunding endeavours per year if their reported income is under $100,000. If they make more, they may invest up to $100,000 or 10% of their income, whichever is smaller. These limits were put in place by the U.S. Congress in order to keep crowdfunding from becoming the new way all companies are funded - leaving it wide open would have meant the traditional, and more controlled, options would have been ignored by the market in favor of the newer, easier, and more easily gamed option. These restrictions also mean that at worst, someone would lose 10% of their income in a bad investment.
=== So how does all this crowd investing work?
In the venture investment business, this is called equity funding - the idea of putting up cash in return for equity (ownership interest) in a business. Most stocks are equity stocks, meaning they are a piece or share of the company. In new ventures, all stock is basically the same, so if the company has issued 100 shares, each share represents 1% of the company.
With a new startup, however, equity is very limited and most of the value of the company is in the perceived idea, product, or business plan the startup has created. A company making a video game, for example, would have a value based on the technology proposed for the game itself as well as the potential value in sales or subscriptions for the game. Many new startups are valued purely on what the investors believe the company would be worth if it were purchased by another, larger company.
If the SEC does the rules right, then crowdfunding will become investing for many ventures and will be easy enough that most regular people can get involved without having to jump through too many hoops. If they do them wrong, then crowd investing will become just another insider's trading game that the rest of us can't really get easily involved in.