Crowdfunding: Opportunities for Local Government

LGiU Ireland’s Hannah Muirhead explores how local authorities can utilise crowdfunding platforms to aid community development projects.

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. There may be examples in Ireland where local authorities have used such tools to underpin community development – if your council has been doing this please let us know and we can highlight such examples to our other members in our next update. In the meantime, we will look at the types of funding available, and how local authorities elsewhere have been using crowdfunding platforms.

The limited take up of crowd funding so far may be in large part down to the fact that councils are rightly cautious about new fads when it comes to handling public money, however, some of this caution could come 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.

There are three main types of crowdfunding, which work in different ways that are accessible to different organisations and groups:

Donations-based crowdfunding involves people donating money towards a project, product or business. These investors have no expectation of seeing that money again.

A target funding amount is set by the individual or organisation that is raising money, and the campaign is listed online where anyone can donate however much they desire. Depending on the platform, the organisation might have to reach its target amount in order to receive any of the money, otherwise no money is taken from the donors.

Sometimes the person or organisation raising money will offer non-monetary rewards for the investment, such as a free entry pass, or the donor’s name displayed somewhere, but often the satisfaction of having contributed to a worthwhile project or an improvement of their local area is all the investors want.

Equity crowdfunding falls into the broader category of equity investment, which involves a company raising money from investors who then own shares in the company. Equity crowdfunding platforms take the equity investment process online and open it up to a wider pool of potential investors – the ‘crowd’.

Only private companies with share capital can raise money through equity crowdfunding platforms, since they must be able to give away legal ownership of part of the organization. While this means that local authorities can not directly raise money through this mechanism, there are still ways that they can benefit from the process.

Councils in other jurisdictions do invest into local companies that have been listed on equity crowdfunding platforms, with the aim of supporting local economic growth, or invest their reserves in businesses as a way of earning a higher return on the council savings. Alternatively, they have been getting involved with equity crowdfunding as a facilitator rather than an investor, by brokering relationships between crowdfunding platforms and local businesses that need finance. Would this be a possible option now that the Local Enterprise Offices are well embedded into all our local authorities?

Peer-to-peer (P2P) lending: Peer-to-peer lending is a funding method that bypasses banks, by matching a borrower directly with an individual or organisation with money to lend. By cutting out the middle man, the lender can earn higher returns on their money compared with putting it in a regular bank account, and the borrower can benefit from a faster, more flexible process.

As is the case for equity crowd funding, local authorities in other jurisdictions can use P2P lending platforms to invest into local businesses, social enterprises, and charities they have identified as needing support. They can also invest their reserves through P2P lending platforms, if the investment options available suit their risk appetite. Equally, councils can use P2P lending to apply to borrow money for their own projects.

Examples:

There are not yet many case studies, if any, of local authorities in Ireland utilising crowdfunding mechanisms but there are examples of councils in other countries embracing crowdfunding. In the United States, local authorities have been crowdfunding to promote the uptake of vacant properties and to regenerate local areas. The Mayor’s Office of Civic Innovation in San Francisco launched their Living Innovation Zones, which designate public areas that businesses or groups can bid to temporarily showcase innovative projects, using crowdfunding as a key part of the finance toolkit.

Closer to home, Warrington Council in England has set up its own P2P lending platform which facilitates lending between public sector organisations. Also in England, in response to a 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.

Other successfully crowd funded projects in the United Kingdom include the roll-out of free WiFi in Nottinghamshire, the construction of a community centre in South Wales, and the opening of an entrepreneur hub in High Wycombe in a former empty building.

While Ireland may not currently be at the forefront of local authority crowdfunding, these examples from councils abroad are becoming an effective means of coping with increasing budgetary restraints, and are definitely ideas that can be replicated in Irish local authorities to deal with similar restraints. As an aid to at least understanding the terminology of crowd funding LGiU UK has produced a useful, in-depth guide, and we would more than welcome the opportunity to highlight examples from Ireland!

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