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Crowdfunding in Ukraine: How it works and how it can be of use to business

Crowdfunding is raising funds from a large number of outsiders to finance a specific project. In Ukraine, crowdfunding can be divided into three areas: fundraising for charitable and social projects, creative or business projects, such as startups. The Page has investigated: what crowdfunding platforms there are in Ukraine and how to raise funds on them.

Crowdfunding in Ukraine

The concept of "crowdfunding" or common, wholesale financing is quite new in Ukraine, but it already has a certain history and positive experience. And it practically does not differ from world trends. The main differences are only in the enshrining of such public funding at the legislative level in more developed countries, for example, the United States.

To date, specialized crowdfunding online platforms have been created in our country that are intermediaries between project founders and sponsors. Funding on such sites is mainly carried out on a charitable basis. The sponsor can get financial reward, but it can also be a souvenir or a copy of a work or product created as a result of a crowdfunding project.

Roman Kobets, Senior Associate and Attorney at the company Inpraxi Law, explains that such sites operate on two principles:

  • "all or nothing"—the authors of the project get funds only when they have collected 100% of the demanded amount. If the financing failed, the money is returned to the sponsors;
  • on a flexible system—the author gets funds when the project has collected a certain percentage of the demanded amount, most often from 50%.

Crowdfunding platforms

Ukrainians use both international and national crowdfunding platforms. Kickstarter is the most popular among the international ones. This platform has been operating since 2009 and has the world's largest sponsor network. However, unfortunately, our citizens cannot register a project on their own. This opportunity is available only for such countries: USA, UK, Canada, Australia, New Zealand, Netherlands, Denmark, Ireland, Norway, Sweden, Germany, France, Spain, Italy, Austria, Belgium, Switzerland, Luxembourg, Hong Kong, Singapore, Mexico, Japan, Poland, Greece, and Slovenia.

Therefore, Ukrainians need to involve an intermediary for crowdfunding on Kickstarter—a resident of one of these countries who will open an account in a bank where the funds will be transferred and who will pay taxes and commissions.

Among Ukrainian platforms, the following are also popular: Spilnokosht, RazomGo, GoFundEd, StartEra, Ulule, etc. Of course, in terms of volumes they are inferior to the well-known international platforms, but today they are drivers of crowdfunding in Ukraine.

Benefits of crowdfunding sites

The benefits of the crowdfunding sites are:

  • expenditure of funds for the intended purpose. According to the rules, most sites do not allow spending the funds of patrons for the needs that are not specified in the project;
  • broad specialization. On crowdfunding portals, one can embody both business ideas and social or charitable ones;
  • transparency. Any person has full access to information about the projects;
  • focus on results. Each project owner fully reports on the stage the implementation of their case is at. If the product fails after entering the market, the money remains with the crowdfunder. If they did not start working on the project after obtaining the funds, the money is returned to the owners;
  • availability. Mostly there is no minimum threshold for joining the projects. You can invest having Internet access and free funds;
  • ease of use. Crowdfunding platforms provide a simple and understandable interface for an ordinary user, without signing a large number of documents, personal presence, and complex structuring.

In addition, such platforms contain certain requirements, the compliance with which is mandatory before starting to raise investments / financing. In particular, there are requirements for the project presentation, relevance, team, budget, deadlines, goals, and the mechanism for implementing the idea.

QuoteViacheslav Ustimenko, Managing Partner of the law firm Icon.Partners, tells The Page that before adding a project to the platform, one needs to carefully read its rules. "The idea may not fit the specificity of the platform, and the time spent cannot be returned. Platforms may also not cooperate with individuals or commercial legal entities, please check this in advance. Draw up a detailed description and strategy for the project development. Funding will not take place if you include only the name and a few sentences about the idea. And keep in mind that the platforms charge a commission on the amount collected for the project," the expert notes.

Usually, the cost of the service for such hosting is 10-15% of the commission from the amount of funds raised.

How to organize crowdfunding?

The success of the rapid spread of crowdfunding is ensured by a successful idea or project, the implementation of which will be of interest to a wide range of people. What is important is the project relevance and understandable information delivered to the potential contributors about the mechanism of its implementation.

«To start fundraising, the authors of business ideas choose a portal where people transfer money for a project. Consideration should be given to the terms and conditions for fundraising, such as: do the platforms allow you to obtain money if it is less than the amount raised; do they allow you to obtain in full the funds amounting to more than 100% of the demanded amount, etc. In addition, you should draw up a portrait of your investor; think over the funding threshold; develop advertising videos to raise funds, etc.»

Roman Babitskyi

Roman Babitskyi

Head of the Council on Foreign Investment and Economic Development of Ukraine

By the way, at present crowdfunding in Ukraine is mainly expressed in financing start-ups implementing innovative projects in the field of computer technology development. After all, it is an effective way to raise investment in start-up projects that do not meet the criteria of the financiers. And it is more flexible and conducive to experimentation.

Note that it is no less important for the project success to introduce a system of rewards for the benefactors that they can get for their investments.

Quote"Benefactors" who intend to invest should understand that such an investment is not, in essence, a financial activity, but rather a kind of donation aimed at the implementation of promising business projects. As a result of their implementation, it is possible, for example, to improve life in a certain region or field of activity, to satisfy certain aesthetic, cultural needs, etc.," the attorney of the company Investment Service Ukraine says.

What are the benefits of crowdfunding in business?

This is, first of all, the possibility of raising funds on the basis of charitable contributions. Indeed, in this case, the project author will have a real opportunity to implement it without significant personal investments or without them at all.

"With the joint charitable financing, there is no need to look for investors for a specific project, as the search for them and raising funds is also usually a rather complicated process."

Oleksandr Ozerov

Oleksandr Ozerov

Attorney at Investment Service Ukraine

In addition, crowdfunding will help if, for example, you already have a finished product that needs to be tested, or you want to release a product line without your own investments and loans. Another option: you have a product that touches with its story and it can get hundreds of likes and comments on social media.

Legal aspects in crowdfunding

Since the use of crowdfunding has not yet been determined at the legislative level in Ukraine, the manifestations of public investment are consolidated by the conclusion of simple agreements between the parties to such relations. They define the goal, the participation of the "benefactor" in the activities being carried out, etc. Unfortunately, this situation scares away many investors and does not allow crowdfunding to develop as much as possible in our country.

At the same time, crowdfunding today opens up opportunities for entrepreneurs and investors. It helps those who would like to join an existing business by investing a comfortable amount of funds.

Quote"Crowdfunding allows an ordinary entrepreneur to raise significant amounts of investment for his project on terms that are more profitable than those offered by banks and other financial institutions. Due to the massive nature of crowdfunding, entrepreneurs can announce their project to a large number of people and find like-minded people or partners," concludes Oleksiy Nedoshovenko, lawyer at the legal group LCF, sums up.

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