How Does Equity Crowdfunding Work – A Beginner’s Guide

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Written By Chris Graebe

Equity crowdfunding’s roots trace back to the early 2010s. Previously, startups and small businesses had a limited pool of potential investors: venture capitalists, angel investors, and bank loans were the typical go-to’s.

But with the birth of equity crowdfunding platforms, it opened up a whole new world.

Suddenly, small businesses could tap into an ocean of individual investors ready to put their money behind innovative products and services.

Crowdfunding platforms like Kickstarter and GoFundMe started as avenues for donation-based crowdfunding – where folks got nothing more than a warm fuzzy feeling or perhaps a branded t-shirt in return for their cash.

However, equity crowdfunding took things up a notch.

Understanding the Basics of Equity Crowdfunding

Understanding how equity crowdfunding works can seem complex at first, but it’s actually pretty straightforward. The process begins when a company decides to sell part of its equity via an online crowdfunding platform.

They prepare a detailed offering, highlighting aspects like financial projections and risks involved, making sure potential investors get all the information they need before deciding whether or not to invest.

Here’s a closer look at the process:

  • The startup prepares an offering, detailing their investment opportunities.
  • They then promote this on a reputable crowdfunding platform.
  • Interested individuals can invest cash, often small amounts.
  • In exchange for their investment, they get shares in the company.

Sounds pretty straightforward, right? But don’t forget about the risk!

Investing in early-stage ventures is risky. There’s always a chance you could lose your entire investment if the company fails or grows slower then projected.

However, there are some regulations in place to protect investors:

  • Companies must provide potential investors with financial statements prepared by an accountant.
  • Platforms need to run background checks on company owners.

But despite these protections, it’s essential each investor understands that no matter how promising a startup seems – failure remains possible. As with any investment opportunity, one should never invest more than they’re willing to lose.

For startups and businesses needing finance but finding bank loans or venture capitalists too strict or unlikely options – equity crowdfunding stands as an exciting alternative.

It doesn’t just provide funding but also creates a crowd of supporters who want to see your business succeed!

Role of a Crowdfunding Platform in Equity Fundraising

Crowdfunding platforms are essentially online marketplaces where businesses can raise funds from a large number of individuals (hence the word Crowd), often for a small amount of money from each person. 

These platforms help companies streamline the crowdfunding campaign process by providing tools to create professional-looking funding pages, promote their campaigns via social media, and manage incoming investments.

On top of that, they also provide security measures to protect both businesses and investors during the investment process.

Risks and Rewards: A Balanced View on Equity Crowdfunding

When you’re hearing about equity crowdfunding, it’s easy to get swept up in the excitement. It’s a new world where anyone can become an investor, even in early-stage startups. However, like any investment opportunity, there are both risks and rewards involved.

Investing in a startup or small business via equity crowdfunding platforms is inherently risky. These companies are often at the early stages of development and may not have proven their business model yet.

There’s always a chance that the company could fail, leading investors to lose their investment capital.

But here’s the flip side – if a company they’ve invested in does well, individual investors could see substantial returns on their investment.

Plus, there’s also the satisfaction of knowing they’ve helped fuel innovation and supported entrepreneurs who might not have been able to secure traditional bank loans or attract venture capitalists.

Here are some key points folks should be aware of:

  • Lack of liquidity: Once you invest in a company through an equity crowdfunding campaign, it’s unlikely that you’ll be able to sell your shares easily.
  • No guaranteed return: Dividends depend entirely on the success of the company. If the enterprise doesn’t succeed as planned or faces issues along its journey – say goodbye to those dividends!
  • Possibility of dilution: If the company raises more funds later on (especially from venture capitalists), your share might be diluted which makes your slice of pie smaller.
  • Regulation risk: While regulatory bodies like SEC provide some security for investors by enforcing strict guidelines for companies raising funds this way – these regulations change regularly.

Despite these risks, equity crowdfunding has opened up significant opportunities for businesses and potential investors alike:

  1. For startups and small businesses struggling with finance issues or rejected for business loans by banks – it provides access to cash without needing collateral or credit card processing.
  2. For “The Crowd” – regular people who want to support innovative product ideas but don’t have industry connections – it allows them to participate directly in these ventures.
  3. For everyone involved: Equity crowdfunding democratizes fundraising while promoting diversity within industries previously dominated by wealthy individuals and institutional financiers.

Real-Life Examples of Successful Equity Crowdfunding Ventures

Let’s look at a few real-life examples of ventures that have soared to success. They’ve made their mark not just by raising funds, but also by amassing a crowd of investors who believed in their potential.

Take Elio Motors, for instance. This innovative company took a leap with equity crowdfunding and it paid off big time! They were able to raise an impressive $17 million via StartEngine’s crowdfunding platform.

Another great success story comes from the camera and live-streaming software company Mevo. They raised $768,130 from 825 investors on Wefunder’s platform and were acquired by Logitech less than a year later for a cool $50.2M.

Notable US Campaigns

Company NamePlatformDescriptionAmount RaisedYear
GumroadRepublicA platform that enables creators to sell products directly to consumers$5 million2021
Elio MotorsStartEngineAn American company producing a three-wheeled car$17 million2015
MevoSeedInvestA live-streaming camera company$4.5 million2020
KnightscopeStartEngineAutonomous security robots$20 million2020
Legion MWefunderThe world’s first fan-owned entertainment company$3 million2016
TernioRepublicBlockchain-based digital advertising company$1.5 million2020
Sun & Swell FoodsWefunderOrganic and sustainable food company$1 million2020
WincSeedInvestDirect-to-consumer wine company$2 million2016

Notable UK Campaigns

Company NamePlatformDescriptionAmount RaisedYear
MonzoCrowdcubeA digital mobile-only bank in the UK£20 million2018
BrewDogCrowdcubeA Scottish multinational brewery and pub chain£10 million2016
RevolutSeedrsA British financial technology company offering banking services£4 million2016
Chapel DownSeedrsAn English producer of wine, beer, and spirits£4 million2014
FreetradeCrowdcubeA commission-free stock trading app£7 million2019

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