Sometimes called fanfunding, hyper funding, micropatronage, or other such terms, crowdfunding can be defined as the experience of raising money from the general public through individual contributions which can be facilitated with a fundraising campaign hosted on a single or another Internet website. A handful of third-party fundraising platforms have garnered all the attention nowadays, like Kickstarter and Indiegogo, but nowadays there are estimated to be over 500 crowdfunding platforms all over the world servicing individuals and organizations of nearly every stripe.
At its root, the crowdfunding concept is very simple. You post your project idea on a website that is initiated to simply accept contributions, spread the phrase about any of it in any manner you can, and hope people become interested enough in it to contribute. There are many general kinds of crowdfunding models, but only three that appear at all relevant for the independent artist--the donation model, the investment model, and the micro-rights model. The donation model runs on the premise that contributors give to a project without expecting any financial return, however some other form of incentive to donate is generally offered (a perk such as a personal letter of thanks from the creator, updates, previews, or whatever). Indeed, bigger incentives are often provided to induce larger donations.
This model commonly involves the majority of money flowing from many donors providing relatively small contributions. For the music artist, donations would usually be towards an audio or video recording project, or a tour, or something the artist needs to obtain in order to pursue their career, such as a bit of equipment. While no two crowdfunding services with this ilk operate in exactly the same way, they typically allow for the project creators to keep all money raised over the lifespan of the campaign, minus a somewhat small commission. The investment model is one where money is provided in return for an offer of something of equivalent or greater value in return. These could take several forms, the most common being lending arrangements and advance purchases of that, but can also including a share of ownership.
The micro rights model allows artists with a music product (or tour) in the works to improve money by selling single-purpose rights (a "micro" licence) to individuals or organizations ready to promote that (or upcoming performance) in their locality in return for a share of the income on eventual sale of product (or tickets) which they pre-order. These could be entrepreneurial types who are trying to earn money for themselves, or non-profits planning to raise funds for their organization or a cause, and they could be inclined to go as far as to really organize a performance event for the artist.
Currently, the donation model is the most used approach in crowdfunding, with well over half of a billion dollars being raised in this way in 2011. For the artist it is really a significant innovation, in that it's a genuine departure from the traditional patronage type of earlier occasions when it was almost exclusively the wealthy who supported creators of artistic works. Another models are arguably less innovative than adaptive, just about fitting pre-existing financing concepts into the networking environment of the Websphere. All sorts of variations on, and even combinations of, the above models exist; and policies, procedures and features vary from site to site. For example, some do not release the funds for you unless a designated monetary target is reached, and will refund everyone's money when it isn't; others permit you to keep whatever is raised. Some offer both options.
Interestingly, you can find artists who have chosen to bypass these crowdfunding "middlemen" altogether and deal directly with the general public, relying independently website, social media, and whatever other means they are able to to drum up support. In such case, an extra amount of trust must form involving the artist and potential contributors than would be the case if these were sourcing via an established third-party site Is StartEngine Legit. The upside is that there are no commissions to pay and you place your personal rules of engagement; plus, constantly and effort you spend marketing your project will undoubtedly be drawing visitors to your website, not that of some third-party. Crowd sourcing in this way did very well for many acts.
Some individuals carry the misconception that raising money through crowdfunding sites is pretty well a slam-dunk, similar to the rather naïve "just build it and they'll come" attitude some have about their own website. Truth is, you have to have an audio strategy around raising money in this way and be diligent about implementing it in order to allow it to be work for you. In this respect, crowdfunding is no distinctive from other methods of fundraising-it takes effort and having something about you or your music that attracts. I have one final thought with this whole subject, which includes regarding the potential legal implications of facilitating financial transactions through a third-party crowdfunding site.
Ideally, due diligence should be undertaken by the artist to ensure that he/she is protected against (and indemnified from) any misrepresentation, negligence, misappropriation of funds, and copyright/patent infringement by the site. For example, look at the possible consequences in case a crowdfunding site an artist was using were to be sued by another site over a patent infringement issue. If the defending site were to lose, or a cease and desist order issued by the court, which may put the site out of action for some time and the artist's funding efforts in limbo. It might even jeopardize already contributed funds still held by that site. To my point, during the time with this writing, Kickstarter just is actually embroiled in a significant legal dispute with ArtistShare over the possible infringement of ArtistShare's crowdfunding patent. It will undoubtedly be interesting to see how that plays out.