Crowdfunding truly revolutionized the way ideas turn into tangible products.
Equity crowdfunding and traditional crowdfunding are two sides of this ever-shiny coin. Though they share a few similarities, it’s their differences that really set them apart.
Traditional crowdfunding is like an online version of fundraising where people can pledge money to a new business venture or cause in return for a product or service.
Folks who are familiar with platforms such as Kickstarter or Indiegogo know the drill. A creator presents their idea to the public, hoping that individuals will be drawn to what they’re trying to do.
On the other hand, equity crowdfunding takes things up a notch.
Instead of just receiving a product or service in return for their investment, investors get shares in the company itself.
They literally buy into the company and become shareholders. This form of crowdfunding opens up opportunities for everyday investors while offering businesses another route to raise capital – all without involving banks or venture capitalists.
Key Differences Between Equity Crowdfunding and Traditional Crowdfunding
When it comes to fundraising, there’s a world of difference between equity crowdfunding and traditional crowdfunding. They might sound similar, but they’re not.
With regular crowdfunding, backers usually receive a product or service in return for their money. It could be anything from an early release of a video game to a limited edition t-shirt.
- For example: If you back a project that aims to produce a new board game, you’ll likely receive the game itself once it’s produced.
Equity crowdfunding? Well, that’s another ballgame entirely.
Instead of getting products or services, investors get shares in the company itself. That means they own part of the company and can potentially gain from its success down the line.
It’s also worth noting how these two methods are regulated differently by law:
| Crowdfunding | Equity Crowdfunding |
|---|---|
| Regulated mostly by consumer protection laws | Regulated closely by securities laws |
Traditional crowdfunding isn’t heavily regulated because contributors aren’t expecting financial returns. They’re seen more as customers than investors.
On the other hand, equity crowdfunding is tightly watched over due to its nature – people are investing with hopes of future financial gains. This additional scrutiny can make equity campaigns more complex and costly than traditional ones.
Benefits and Risks
Let’s dive right into the heart of the matter – the benefits and risks associated with equity crowdfunding and traditional crowdfunding.
First up, equity crowdfunding. It offers some pretty enticing benefits:
- Investors can acquire a stake in a company they believe in.
- There are opportunities for high returns if a startup takes off.
- It democratizes investment, as anyone can become an investor regardless of wealth or social status.
However, it’s not all sunshine and rainbows.
There are risks involved too:
- Startups are inherently risky; many fail within the first few years.
- Liquidity is often limited as there is usually no secondary market to sell your shares.
- Information asymmetry can exist where founders have more information about the business than investors.
Now, let’s talk about traditional crowdfunding.
Here are some of its highlights:
- Backers often receive product rewards which can be exciting and valuable.
- It’s a great way for startups to validate their product before investing heavily into development.
- Donors feel good about supporting projects they care about.
But like everything else, it carries its own set of risks:
- If project goals aren’t met, backers may not receive their expected rewards.
- Projects might take longer than expected to complete or might never get completed at all.
- There’s always a risk that fraudsters could misuse funds raised through crowdfunding campaigns.
Regulations
Navigating the world of crowdfunding, one quickly discovers that it’s not a free-for-all. There are specific rules and regulations in place.
For equity crowdfunding, the Securities and Exchange Commission (SEC) plays a big role. They’ve established some ground rules:
- Companies can raise up to $5 million in aggregate in a 12-month period.
- For non-accredited investors:
- If either your annual income or your net worth is less than $124,000, then during any 12-month period, you can invest up to the greater of either $2,500 or 5% of the greater of your annual income or net worth.
- If both your annual income and your net worth are equal to or more than $124,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $124,000.
- Investors with an annual income or net worth less than $100k can invest a maximum of $2k or 5% of their annual income/net worth (whichever is greater).
- Those with an income or net worth above $100k can invest up to 10% of their annual income/net worth.
| Limit | Annual Income/Net Worth Under $124k | Annual Income+Net Worth Above $124k |
|---|---|---|
| Maximum Investment in 12-month period | $2,500 OR 5% of annual income. | Up to 10% of annual income or net worth, whichever is greater, but not to exceed $124,000. |
On the other hand, traditional crowdfunding doesn’t face these same restrictions because people aren’t buying equity in a company. Instead, they’re typically donating money or contributing in exchange for a product or reward.
However, there are still rules about what you can and cannot do on various platforms like Kickstarter and Indiegogo:
- Projects must be honest and clearly presented
- Creators must refrain from offering prohibited items as rewards
- Projects can’t fundraise for charity or offer financial incentives
Recent Trends and Statistics
The crowdfunding landscape has seen quite some change in recent years.
According to a Gitnux report, equity crowdfunding now accounts for over 17% of the alternative finance market.
In 2022, $494M was raised by companies in Regulation Crowdfunding (Reg CF) campaigns.
And traditional crowdfunding isn’t slowing down either. Statista reported that Kickstarter, one of the leading reward-based platforms, hosted more than half a million projects since its inception through January 2021.
The same study revealed the following statistics about Kickstarter’s success rate:
- Total number of successfully funded projects: Over 200k
- Amount pledged for successful projects: More than $4 billion
These trends show how both types of crowdfunding have become increasingly popular tools for entrepreneurs who are looking to raise funds for their business ventures.
But remember – while these figures seem promising, both equity and traditional crowdfunding come with their own set of risks and rewards. It’s crucial to do your homework before diving into any kind of funding venture!