Presenting your firm to venture capitalists may not be an option for first-time entrepreneurs or small businesses, but crowdfunding can help you locate accredited investors as well as regular people willing to back your enterprise. This article contains all you need to know about how equity crowdfunding works, including the pros and cons, as well as the best platforms you can use.
What Is Equity Crowdfunding?
Equity crowdfunding is a type of security-based crowdfunding. Securities are issued to the general public. In other words, a company’s founder issues public shares in exchange for an investment. Investments range widely, but many begin in the thousands of dollars.
Investors receive incentives in different forms of crowdfunding. They may invest in a startup or simply a concept in exchange for being among the first to acquire a product. Then there’s the donation version of crowdfunding, in which investors offer dollars with no expectation or promise of a reward or return.
How Equity Crowdfunding Works
There are numerous online crowdfunding venues to select from. These platforms not only provide a structure for collecting investments, but they also provide extra features and services such as support, marketing, and different payment methods.
The Securities and Exchange Commission has registered these platforms. Individual donations are restricted to keep people from becoming “overly passionate” about investments. Businesses are limited in how much they may raise, but it’s still a sizable figure – up to $50 million in a 12-month period, depending on which fundraising tier you choose (all of which are regulated by the SEC). Businesses must be headquartered in the United States or Canada.
Best Equity Crowdfunding Platforms
#1. StartEngine
StartEngine is one of the largest venture crowdfunding sites, using Regulation CF and Regulation A+ to offer shares in new firms to anyone for as little as $100 in some situations. The options are numerous and include a wide range of industries, from clothes to electric vehicles to health care. However, investors should be aware that curation is quite restricted, so venture quality might vary widely across available contributions.
Recently, StartEngine began launching “Initial Coin Offerings,” or ICOs, which utilize the developing blockchain and cryptocurrency ecosystem. In addition to ICOs and startups, StartEngine now allows investors to invest in the company itself through a Reg A+ offering.
Typically, investors receive either common stock or a convertible note. However, the particular asset types vary depending on the transaction. All of the offerings on the crowdfunding platform appear to be direct investments rather than through a special-purpose company such as a Limited Liability Corporation (LLC).
#2. SeedInvest
SeedInvest is a prominent Equity Crowdfunding Platform that assists thoroughly vetted entrepreneurs in raising large sums of money. It was named the fourth fastest-growing private financial services firm in America on Inc.’s annual list in 2018. SeedInvest, founded in 2012 by Ryan Feit and James Han, has been instrumental in changing U.S. securities regulations to include equity crowdfunding.
SeedInvest was the first equity crowdfunding platform to allow average investors who did not meet the criteria for accredited investors to invest in firms on its platform, providing campaigners with a larger potential investor base. Meanwhile, SeedInvest connects you with other accredited investors. It has over 250,000 total investors, over $150 million invested, and over 150 startups sponsored.
SeedInvest is flexible in terms of who can invest in firms on its website, but it is significantly more exclusive in terms of the groups who can run campaigns on its platform. It is only for business fundraising, with consumer-facing and tech enterprises accounting for the majority of successful campaigns. SeedInvest conducts extensive due diligence on organizations that apply to use their platform, and they estimate that only 1% of firms that have applied have been approved.
#3. AngelList
AngelList, one of the oldest and most established equity crowdfunding platforms, was started in 2010. This platform is unusual in that it is the only crowdfunding site that also functions as a job board for those looking for work in a company. AngelList’s employment platform links developers, engineers, marketers, medical experts, and other brilliant job seekers who are looking for work. To access AngelList’s employment board, you do not need to register as an investor. Simply sign up for AngelList on the internet, fill out your profile, and launch your crowdfunding campaign for free! After that, this platform will connect you with accredited investors.
But, in order to raise funds, AngelList syndicates must be interested in you. Businesses that raise funds on AngelList do so through investment syndicates. Accredited investors essentially provide money to “angel” investors, who subsequently invest it in firms on the platform. Although launching a campaign is free, negotiating a deal with these syndicates may be costly due to paperwork, legalities, and so on.
#4. Republic
Republic is a crowdfunding platform that allows everyone to invest in startup businesses. It is governed by the Securities and Exchange Commission of the United States. Individual investors can contribute as little as $10 to private enterprises and earn a profit if the venture succeeds.
Republic developed and launched its Note reward token program in April 2019. Republic customers were recognized for their contributions to the global startup ecosystem through this program. Millions of Republic Notes have been distributed, thousands of users have been acquired, over 300,000 users have participated, and five firms have successfully funded $1 million on Republic’s platform since the program’s inception. These include:
CHRGR —a brand-boosting advertisement
InnaMed — company that uses smart, at-home blood testing technology to enable tailored therapy
Mealthy —home cooking simplified
Sapient — a company that uses machine learning to reduce energy waste
SimpleShowing — a new approach to touring and purchasing a home
#5. MicroVentures
MicroVentures, founded in 2009 by Bill Clark and based in Austin, is an equity crowdfunding platform that allows accredited and non-accredited investors to invest in early-stage enterprises. It specializes in Regulation Crowdfunding, which is a type of equity crowdfunding in which everyone, not just accredited investors, can contribute.
Businesses on this platform can also launch Regulation D Rule 506 fundraisers, but only to approved investors. Furthermore, MicroVentures is one of the few equity crowdfunding sites that has been approved as an intermediate merchant by the Financial Industry Regulatory Authority (FINRA).
MicroVentures has a reputation as a powerhouse in the equity crowdfunding market due to its status as an industry pioneer. It offered investments in Twitter and Facebook before they were available to the general public. It is a trustworthy platform that has seen over $100 million in investment sent to a very limited group of organizations.
#6. WeFunder
Equity crowdfunding is a new kind of business method, and few companies are ready to fully take advantage of it. Ever since the JOBS Act was enacted into law in 2012, Wefunder is one of the few equity crowdfunding platforms that actually opens up the world of investing to anybody.
Wefunder provides a platform for equity crowdfunding to US companies and LLCs, connecting them with around 150,000 registered investors (as of November 2017). An organization can create a profile on Wefunder for free, but when it comes time to start generating funds, a $195 fee must be paid.
#7. Dealmaker
Dealmaker is the best capital-raising technology. They are the Shopify of capital markets, and unlike marketplaces like Start Engine, you control the entire experience on your own platform. Dealmaker serves as the white-label technology supplier for your capital raise.
Dealmaker is the clear leader and the great majority of the top equity crowdfunding fundraising employs their platform. This includes an $80 million cash fundraising for Miso Robotics.
What Is The Benefit of Equity Crowdfunding?
The key benefit of equity crowdfunding is that it allows you to raise significant sums of money fast via crowdfunding platforms. You might go from underfunded to fully funded in a matter of weeks once you and your lawyer have arranged your share offering and selected a platform. Traditionally, you’d have to approach each investor separately and pitch your idea to them, which can take years.
Another significant advantage is that you keep corporate control rather than having an investor on your board with a say in your firm’s actions. Additionally, because investors are part owners with a vested interest in the company’s success, you have a team of passionate brand champions from the beginning. This entails a group of people who share your brand with their networks and raise exposure for your items while also building brand loyalty.
Pros and Cons Of Equity Crowdfunding
Equity crowdfunding has its pros and cons, just like every other form of crowdfunding. The pros of crowdfunding are:
#1. An alternative to conventional finance
When you need to obtain capital quickly, equity crowdfunding is an excellent choice.
The simple method speeds up the creation and publication of campaigns. Equity crowdfunding is also a good option because you can quickly customize your homepage and showcase your activities or campaigns.
#2. You get to evaluate interest in your company, as well as receive professional criticism and suggestions for improvement.
Equity crowdfunding, believe it or not, is a surprisingly good technique to test the audience’s reaction or attractiveness to your business product/idea.
If people are prepared to invest in it, it’s a solid indication that your idea will be successful in the market.
Equity crowdfunding enables you to swiftly and cheaply validate market concepts and give the information required to justify investments in the research, planning, and analysis phase. This is necessary in order to bring those concepts to market.
Feedback on market demand, product demand, and improvements is required and critical in every organization. You must, however, be able to define what great feedback means for your company.
#3. Investors may monitor the development of your campaign, which might assist you in promoting your business online.
Equity crowdfunding platforms offer fundraising statistics to assist you in tracking the progress of your contributions.
These platforms will be outfitted with the necessary infrastructure to allow you to simply identify your investor and learn more about their past.
Knowing why your campaign was successful (or not) will play a significant influence in attracting new funders for future efforts.
#4. During the fundraising process, investors are frequently the most devoted customers.
The most spectacular achievement in investment crowdfunding is when a company can convert its most loyal consumers into investors.
It might be claimed that investor retention is about paying attention to existing investors and seeking unique and engaging ideas and strategies to turn them into committed investors.
Investor loyalty is divided into two parts: attitude and behavior. The retention pattern is determined by an individual’s attitude, which indicates an individual’s purpose to reinvest and urge others to invest. Short-term advertising and marketing efforts, like loyalty programs, are promoted to improve investor confidence in reinvestment.
A devoted investor also exhibits a high level of psychological commitment and identity to a campaign, which can help to modify and implement the campaign. When loyal investors’ psychological demands are addressed, they are more inclined to continue investing in your company. Investor involvement results in psychological identification and investor commitment to current and future initiatives.
Investing in a company’s shares is the most successful brand loyalty campaign. Businesses that prioritize long-term connections with their investors strive to create long-term ties with their investors. You may increase your business relationship with your investors by converting them into loyal investors.
The cons of crowdfunding include:
#1. Equity crowdfunding is not available for all projects or enterprises.
The majority of equity crowdfunding operations succeed in the B2C (business-to-consumer) market. B2B (Business to Business) startups do not typically achieve the same level of success.
The distinctions between B2B and B2C businesses are significant, particularly when it comes to crowdsourcing investments. Because business direction influences investment prospects, focusing on corporate and client projects is a potential strategy to comprehend crowdfunding behavior.
Nonetheless, B2B has grown in popularity over time. As a result, investors may consider B2B products to be a more viable possibility. The product type of a technically difficult B2B firm is related to the direction of the B2B marketplace and the entire B2B experience in this scenario.
This is heavily influenced by the investment community. When you look at a product that has a clear and precise influence on the end user, you can quickly see why B2C businesses are usually more successful than B2B businesses. Their objectives are clear, and their investment is more active. The term “responsible” refers to the process of determining whether or not a product is responsible.
#2. Selecting the best crowdfunding platform will consume your time and resources.
Many businesses underestimate the time, work, and organization required to finish a crowdfunding campaign.
Frequent investor contact, detailed financial reports, predictions, POA (Plan of action) for investment money, and so on. These are Standard Operating Procedures (SOPs), and they must be followed before the crowdfunding activity may begin.
Understanding crowdfunding businesses and services is essential for selecting the best crowdfunding platform. Product quality and reputation are critical considerations that should be prioritized. A certified certificate might help your items be more reliable. You can, for example, obtain a trademark registration certificate.
These precautions must be implemented; else, entrepreneurs risk being labeled as unprofessional.
#3. Your business idea could be stolen if you don’t patent or copyright your business idea.
Theft of ideas is maybe the most serious issue with crowdfunding. Due to the public nature of crowdfunding, entrepreneurs may be subject to fraudulent attacks, with their ideas stolen and passed on to other investors and enterprises.
Crowdfunding platforms that exist today are mainly governed by intellectual property regulations that safeguard their content. However, steps must be taken to protect crowdfunding platforms, such as automatically applying for a patent and copyright trademark after the content is published.
The main cause for this could be a lack of awareness about intellectual property rights protection and resource protection within that ecosystem or country for authority to successfully enforce intellectual property rights. Finally, there have always been issues with copyright and trademarks.
All things considered, determining which source of financing is best for your business necessitates the careful analysis of all options, whether traditional or alternative, such as equity crowdfunding.
What Is Real Estate Crowdfunding?
Crowdfunding, as defined by the foundational book “The Crowdfunding Bible,” is the process of requesting the general public to contribute money or starting capital to help support new companies. Concepts can be marketed directly to everyday Internet users via this type of online fundraising, in which open calls to possible investors are put on websites alongside prospective investment opportunities. Individuals who contribute to a pool of funds sourced from others with similar interests might give financial support for present or potential real estate ventures. Such opportunities can take the form of residential or commercial holdings and can include either the building of new housing, retail, or office space or a portion of an existing holding. Individuals may be interested in and investigate these types of real estate opportunities for a variety of reasons, including:
- Possibility of diversifying assets and investment portfolio holdings
- In comparison to traditional real estate ventures, beginning money is little.
- The shared cost structure allows financiers to invest in larger property holdings than they would otherwise be able to.
- The risks associated with ownership are distributed among several parties.
- Gaining access to novel and/or exclusive opportunities
- Possibility of owning commercial real estate or a real estate portfolio in addition to residential properties
- Provides exposure to the real estate market without the requirement for personal care and maintenance.
- There is no requirement for each individual to qualify for, secure, and make regular mortgage payments.
- Owners are not required to physically guarantee loans with property and assets.
The Benefits and Drawbacks of Real Estate Crowdfunding
Real estate crowdfunding, like any other kind of real estate investing, has its ups and downs. Before committing cash to a crowdfunded real estate project, it is critical to analyze the following benefits and drawbacks of connected sites and investments.
Benefits
- Pays higher dividends than standard real estate investments.
- Enables property owners to potentially diversify and enhance their financial holdings.
- Access to one-of-a-kind real estate projects and opportunities
- Eliminates numerous typical difficulties that property owners and landlords frequently face. Requires less upfront and ongoing investment than traditional real estate ventures.
Drawbacks
- Crowdfunding platforms may charge management or advisory fees to investors.
- Assets are difficult to sell or divest rapidly. Participants must pay taxes on any dividends received.
- Several platforms and projects lack a long track record of success because they are relatively new offers.
- Certain platforms may require participants to be accredited investors (generally well-capitalized).
What Is The Difference Between Crowdfunding and Equity Crowdfunding?
Crowdfunding is the practice of raising funds from the general public using online forums, social media, and crowdfunding websites. Equity crowdfunding is transferring relatively small sums of money in exchange for a proportionate share of the company’s equity.
Is Equity Crowdfunding Risky?
The biggest risk of equity crowdfunding is that you may wind up with lower-quality investments than if you solicited funds from more traditional sources such as venture capitalists or angel investors.
What Are The 4 Types Of Crowdfunding That Exist?
The 4 main types of crowdfunding include donation, reward, equity, and debt crowdfunding options.
In Conclusion,
Equity crowdfunding is a type of security-based crowdfunding in which securities are issued to the general public. Through equity crowdfunding, you can sell shares of your company to anyone in exchange for equity in your company. And, no, it’s not just for tech firms, it’s for every company.
Related Articles
- WHAT IS CROWDFUNDING: Meaning, Uses, Advantages & Disadvantages
- SMALL BUSINESS INVESTORS: How To Find One
- COMMERCIAL REAL ESTATE INVESTING: What It Entails and How to Start Up Investing
- HOW TO GET INVESTORS: Complete Guideline For Startups
- REAL ESTATE INVESTORS: 2023 Guide for Beginners and Pros (Detailed)
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