Equity Crowdfunding: Working & Benefits

Attracting traditional investors to help fund your startup can be difficult for a small business owner. According to the business crowdfunding platform Fundable, less than 1% of startups receive funding from angel investors, and only.05% receive venture capital.

 

On the plus side, you may be able to leverage shares of business equity in exchange for capital through an equity crowdfunding strategy. Equity crowdfunding is not appropriate for every entrepreneur. However, if you're looking for debt-free ways to fund your business, it could be a good fit.

 

What is Equity Crowdfunding? 

 

Equity crowdfunding (also known as crowd-investing or investment crowdfunding) is a type of capital-raising strategy used by startups and early-stage businesses. Equity crowdfunding, in essence, offers the company's securities to a number of potential investors in exchange for funding. Each investor is entitled to a proportionate share of the company based on their investment.

 

Equity crowdfunding is distinct from other types of crowdfunding, such as rewards crowdfunding and donation crowdfunding. By offering financial securities to investors, the model provides a more traditional method of raising capital.

 

Crowdfunding is done through specialized online platforms such as Wefunder and StartEngine. The crowdfunding platform's digital nature encourages more liberal and open financing.

 

Unlike traditional capital-raising methods for early-stage companies, which rely primarily on investments from a small group of professional investors, equity crowdfunding appeals to a broader audience. The primary goal of equity crowdfunding is to raise the necessary capital by soliciting small contributions from a large number of investors.

 

Equity crowdfunding is a novel way to raise capital for your company without incurring new debt. It's a type of fundraising in which you try to attract investors who are willing to contribute funds to your company's goals in exchange for a financial stake in the company.

 

In general, equity crowdfunding is a business funding model in which smaller sums of money are collected from a larger number of private investors. Potential investors may be able to participate for as little as $100. This approach differs from attempting to attract large investments from venture capital firms or angel investors, which is out of reach for many startups and established small businesses alike.

 

Also Read: What is Crowdfunding? Types, Benefits, and Tips

 

How does Equity Crowdfunding work? 

 

Given that it is governed by the federal government, equity crowdfunding is also known as regulation crowdfunding. Even if you are not selling shares on a stock exchange, your company is still offering equity in exchange for capital to investors. As a result, the process has more rules than a simple online fundraising campaign such as GoFundMe or Kickstarter.

 

Following the rules is critical if you want to use equity crowdfunding to raise capital for your business. Otherwise, you may face some unfavorable consequences. Failure to follow the rules, for example, may force you to refund any investments you receive. In some cases, the Securities and Exchange Commission (SEC) of the United States may even suspend your company's ability to offer shares to investors for a period of time.

 

Web platforms that publish companies open to investors power equity crowdfunding. It is a difficult procedure. For a business owner, the securities issued to the crowd should be well-regulated and registered. This not only protects investors from fraud but also provides them with a clear picture of all the detailed information required to make a decision.

 

Entrepreneurs can select from a variety of equity platforms to publish their companies for crowdfunding. Make sure to do your homework and find someone you can trust and believe in. These platforms then handle all of the exchanges and provide all of the necessary support for a successful transaction. You have the option of using multiple platforms.

 

In India, crowdfunding for startups must be either donation-based or debt-based; startups cannot receive equity-based crowdfunding. Crowdfunding for a startup can occur both offline and online, through platforms such as Milaap, Gofundme, and others.

 

In the past, there have been successful instances of offline crowdfunding. To create and publicize campaigns for crowdfunding, whether online or offline, some effort is required. For centuries, authors have used the practice of crowdfunding to evaluate their ideas. If people liked the book's concept, they contributed to it, and the author published it.

 

Crowdfunding provides numerous benefits to startups. Crowdfunding platforms allow people to evaluate the startup's plan and provide valuable feedback. It also demonstrates consumer interest and greatly popularizes your brand.

 

Benefits of Equity Crowdfunding: 

 

Equity crowdfunding is a novel approach to investing and capital raising. It can provide several advantages to both businesses and investors.

 

The most significant advantage of crowdfunding is the ease with which a larger sum of capital can be raised in a short period of time. When you take a closer look, you will notice that equity crowdfunding saves you time because you do not have to pitch each potential investor individually. Equity crowdfunding takes months or even weeks, whereas individual pitching can take years. Some of the other advantages offered are:

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Benefits of Equity Crowdfunding

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1. Easier capital access:

 

When compared to traditional forms of capital raising, online crowdfunding platforms allow entrepreneurs and businesses to showcase their projects to a larger number of potential investors.

 

2. Less stress on management:

 

Unlike traditional forms of financing, such as venture capital, equity crowdfunding does not result in a company's power being diluted. Despite the increased number of shares, the involvement of a large number of investors means that power is not concentrated around a small group of shareholders.

 

3. Increased Market Visibility for New Businesses:

 

Low market visibility is a serious issue for many startups that are not led or advised by well-connected entrepreneurs or executives. Even the best idea in the world will fail if no one knows about it.

 

Getting listed on one or more equity crowdfunding platforms, and ideally executing a successful capital raise, as a result, can significantly improve the market visibility of emerging companies.

 

Some equity crowdfunding platforms prominently display successful raises on their home pages, alerting visitors that the featured companies are doing well. Even in the absence of such free publicity, founders can easily and inexpensively publicize their success through press releases and social media.

 

4. Potential for a High Return on Investment:

 

The most significant advantage of equity crowdfunding for investors is simply having skin in the game.

 

Although the majority of startups fail, wiping out early investors in part or entirely, many go on to succeed. And a few, dubbed "unicorns" in the industry, achieve spectacular growth and eventually dominate their markets.

 

After all, Google and Amazon were once tiny, insecure startups that were viewed with skepticism by mainstream investors. Traditional crowdfunding campaigns provide tangible rewards for those who contribute funds, such as a facility tour or free merchandise. They do not, however, provide a stake in a potentially profitable business.

 

Types of Crowdfunding: 

 

Equity crowdfunding is only one type of crowdfunding. Each type has distinctive characteristics. Other types of crowdfunding are discussed further below:

 

1. Reward Crowdfunding

 

Entrepreneurs who use reward-based crowdfunding do not have to repay the funds raised; instead, you provide backers with incentives or thank-you gifts such as early access to your product, a company-branded t-shirt, or even a trip to meet you and your team. One example is Indiegogo. The incentive should be proportionate to the amount donated. The funds you raise in this manner will be taxable.

 

2. Crowdfunding through donations:

 

Donation-based crowdfunding, one of the most popular types of fundraising, simply asks for a small donation from a large number of people to raise money for a cause you care about.

 

Donation-based crowdfunding is best used to raise funds for both personal and community-based projects. You can raise awareness and encourage donations by sharing your fundraiser with your personal network and on social media. 

 

Donation-based crowdfunding examples include raising funds to cover medical expenses or an unexpected financial crisis, as well as raising funds for local projects such as a community garden or a new park.

 

3. Debt Crowdfunding:

 

Debt crowdfunding, also known as peer-to-peer lending and crowdlending, is a quick and easy way for both individuals and businesses to raise the money they need when they need it.

 

Debt crowdfunding works by collecting donations and promising to repay them later. Debt crowdfunding is typically used by businesses that require capital but prefer to repay the funds rather than provide equity. Individuals also used debt crowdfunding to pay off a loan or another financial obligation. 

 

When organizing a debt fundraiser, make it clear what the funds will be used for and when donors can expect repayment.

 

4. Donor Crowdfunding:

 

Donor crowdfunding, also known as donation-based crowdfunding, is a method of raising funds for a good cause without expecting anything in return. Friends and family members, for example, may donate money to support a loved one's dream of starting a new business. Charities and nonprofit organizations can also use this type of crowdfunding to solicit donations from supporters who believe in the cause they are advocating for.

 

There are numerous online platforms for donation-based crowdfunding campaigns. GoFundMe, CrowdRise, and Fundly are a few examples.

 

5. Real estate crowdfunding:

 

Among the most recent types of crowdfunding models, real estate crowdfunding is gaining popularity among investors who want to invest in real estate without the hassle of obtaining a traditional loan or the obligation of owning the entirety of a single property.

 

Typically, a person or a real estate company will raise funds from investors to purchase a large property, such as an apartment building. Real estate crowdfunding allows investors to contribute much smaller sums of money, typically starting at $5,000, depending on how much of the property they want to own. Investors will then receive quarterly payments based on the amount of revenue generated by the property.

 

Conclusion:

 

Finally, one of the best aspects of equity crowdfunding is that anyone can invest in your business. It is not limited to venture capitalists and private equity firms. To invest in equity crowdfunding, all you need is an internet connection and $100. Thanks to the JOBS Acts of 2012, you don't need a broker-dealer to invest, and the company doesn't have to hold an initial public offering (IPO). Equity crowdfunding may appeal to first-time investors as a less complicated or intimidating alternative to traditional investment opportunities.

 

Equity crowdfunding is still a relatively new phenomenon, having emerged only since the turn of the century. As a result, some countries have only recently passed regulations governing such fundraising methods, while others have only loose, generic regulations in place.

 

Because the fundraising model is potentially prone to fraud, one of the primary goals of regulation is to protect investors.