This way, Companies issue equity, debt or contractual instruments to crowd-investors, typically through an online platform (although this is not always the case). This model has been developed through a variety of funding mechanisms, often to adapt to different regulatory requirements in EU Member States:
For example, when investors invest in the equity of a company through a crowdfunding platform, they can do so either directly and hold shares of a company themselves, or through a nominee account, whereby a third party holds the legal titles of the equity on behalf of the investors who are the beneficial owner of the security.
In other models, investors invest indirectly through a participation in a separate legal entity (e.g. special purpose vehicle or collective investment scheme set-up by the platform) which then invests in the crowdfunding project and holds the legal title of the equity. This is used for example in real-estate crowdfunding (where the intermediary vehicle invests in property and investors hold shares of the vehicle).
The typical debt investment-based crowdfunding model involves a bond (for example mini-bonds85), at a fixed interest rate. There are also examples of crowdfunding models involving convertible bonds (where bonds can be converted into equity at a predetermined conversion rate at a later stage).
Finally, in a profit-sharing / revenue-sharing crowdfunding model, businesses can share future profits or revenues with the crowd in return for funding (whereas the investor does not obtain any long-term ownership interest in the company through the securities that the investor has bought). Often these forms of crowdfunding are operated through contractual instruments (e.g. silent partnerships) which would not qualify as a security under company law.
For avoiding the conflict of interest, the involvement of independent risk & value managers is necessary. The platforms owners / operators should not ensure the business valuation, risk & value due diligence, investment advisory, at all. Otherwise the segregation of responsibilities principle for protecting the investors, is not observed.