Equity Crowdfunding provides a door for entrepreneurs to open who wish to gain access to capital. Startup owners raise capital from the crowd through the sale of securities in a private company that is not listed on a stock exchange.
The principal idea of equity crowdfunding is to raise the required capital by obtaining small contributions from a large number of investors. This is typically through share sales, but can also be through other instruments such as convertible notes or debt.
How does it work?
Potential investors are able to visit a funding portal website and review different equity crowdfunding investment opportunities. Certain restrictions apply in terms of age (being over 18) and limits on how much capital an individual can invest based on their income and net worth.
Investors in equity crowdfunding stand to make a profit if they make a good investment and the company they invested in grows.
What are the benefits for the company?
Crowdfunding platforms allow entrepreneurs and companies to showcase their projects to a larger number of potential investors, as compared to conventional forms of capital raising. This has potential benefits for the company – it can create hundreds of brand ambassadors. The company captures an audience that can spread the word and share the product with their own networks.
The entrepreneur raising capital has control over the offering; what to sell, how much and at what price. The company can also set a minimum and maximum funding goal and there is no other 3rd party demanding certain terms.
It does not lead to a dilution of power within a company. Although the number of shares is increased, the involvement of a large number of investors means that power is not concentrated around a particular group of shareholders.
What are the benefits for the investors?
Companies raising capital through equity crowdfunding are private yet are raising capital from the public. Historically, this was only possible for accredited investors such as VC’s, Angel Investors or HNWI’s. Through equity crowdfunding everyone has access to these opportunities.
With equity crowdfunding the shares can be traded on public markets. This means that if an investor wants to sell their shares they can do so. There is no lock-up period, as there may be with other capital raising routes. This liquidity is possible because the rules of equity crowdfunding allow companies to have more shareholders before it is required to become a publicly reporting entity. With the larger number of different shareholders there is a larger market and therefore more liquidity.