Crowdfunding
The development of the financial sector is one of the main pillars of the Kingdom's Vision to achieve its goals, as it acts as the primary driver of the market, directly impacting the Gross Domestic Product (GDP). To achieve this objective, lawmakers have made tremendous efforts to regulate a market that offers financial services previously unavailable to local companies, which had relied solely on banks as their primary source of financing.
So, what is crowdfunding? And what are its types?
Crowdfunding is defined as the process of collecting small amounts of money from a large group of investors through platforms that connect companies seeking funding with investors.
Since the launch of crowdfunding products of various types, there has been tremendous demand from companies seeking funding. This demand is driven by several key features of crowdfunding, such as the speed of obtaining funds and the flexibility in repayment methods. On the other hand, these products have also attracted significant interest from investors by offering attractive returns and access to assets previously absent from their portfolios, such as debt instruments and private equity, which were difficult to invest in.
Types of Crowdfunding:
1. Debt Crowdfunding:
This is a financing process where ordinary and/or qualified investors, investment funds, and/or companies contribute to financing a company after assessing its financial and credit situation. This type of financing serves businesses of all sizes. For investors, it is a good way to diversify their portfolios and mitigate risks.
2. Equity Crowdfunding:
Equity crowdfunding involves selling a defined share of the company’s ownership through public offerings in exchange for capital. A downside of this type of financing is the dilution of the main shareholder’s ownership due to the entry of new investors.
3. Real Estate Crowdfunding:
This type of crowdfunding has recently gained popularity, particularly due to the strong demand for real estate among investors. It fills the gap between real estate developers in need of liquidity and investors seeking returns but lacking the capital required to fully enter the real estate market.
4. Charity Crowdfunding:
This type of crowdfunding aims to collect donations for purposes such as covering medical expenses or unexpected financial crises, like loan defaults or overdue bills. The Ehsan platform has been a pioneer in this field. Launched under Royal Decree No. (48019) dated (1441/08/13 AH), the Ehsan system leverages data and artificial intelligence to maximize the impact and sustainability of development and charitable projects and services. It provides advanced technical solutions and builds effective partnerships with government, private, and nonprofit sectors to strengthen the Kingdom of Saudi Arabia’s leading role in development and charitable work and to increase the nonprofit sector’s contribution to the overall GDP.
