The Ins and Outs of Equity Crowdfunding
Obtaining capital infusion (investment dollars) for your business isn’t as easy as it used to be. While true that banks review your entire credit history (and credit worthiness), a business owner may be able to overcome certain financing obstacles if the business has a solid cash flow coming in.
However, not all early-stage businesses have the ability to generate positive cash flow at the beginning. In 2022, with much greater financial uncertainty (and instability in the world), inflation is rising, and interest rates are rising—banks are a lot more stingy with their lending.
What’s a motivated entrepreneur to do?
That’s where Equity Crowdfunding comes into play. This type of Crowdfunding puts business owners and entrepreneurs back in the driver’s seat and in control of their financial destiny.
What is Equity Crowdfunding?
Equity Crowdfunding is an investment vehicle for business owners to raise capital for their private businesses. Typically, most Crowdfunding activities of this type take place on online platforms like EquityNet or StartEngine.
When using an online platform like the ones mentioned in the previous paragraph, project creators are subjected to management fees, and transaction fees (and usually above and beyond what is charged by payment processors). If you use a self-hosted Crowdfunding platform like IgnitionDeck, you get to reclaim those fees and keep more of your campaigns’ funds.
Equity Crowdfunding differed in that there is no debt generated by the business or business owner and rather than paying out rewards or accepting a donation project creators instead sell shares of their company and/or product, thus empowering and incentivizing their investors.
Is Equity Crowdfunding like a Kickstarter or a GoFundMe?
In short, no. Kickstarter is a donation and rewards-based crowdfunding, something we get into in our Rewards and Donations Crowdfunding article. Donation and rewards-based crowdfunding, as the name indicates, rewards users based on the amount of their donation.
Who is Equity Crowdfunding right for?
The good news is that Equity Crowdfunding is right for almost any business. Businesses looking to validate a product idea, sell an ownership stake in the business.
Maybe you’re a law firm, and you want to invite a new Partner to the team. The law firm would offer a stake of ownership to that new Partner, and they, in turn, would pay some fee to access that ownership stake and the benefits that come with it.
Early-stage startups established businesses, and non-profits round out but are not an exhaustive list of the kinds of business structures well-suited to take advantage of Equity Crowdfunding activities. Startups like Zenefits, Hello MD, and MeoWolf
Providing an ownership stake in exchange for being able to access the benefits of a potentially profitable business is compelling and one of the main drivers pushing the popularity of Equity Crowdfunding today.
What are the pros and cons of Equity Crowdfunding?
The benefits to raising a series of investments for one’s business via Equity Crowdfunding are numerous
The benefits of Equity Crowdfunding
- Business owners needn’t rely on a bank or venture capital to raise funds for their business or product idea. This allows the business much more freedom and avoids pesky debt that can hamper getting a future loan if required. But also, it sure is nice not to have to pay back large loans
- Allowing many investors to invest in your business potentially provides greater investment as you are providing investors ‘skin in the game’ to participate in your business’s success.
A few downsides to raising capital via Equity Crowdfunding
- Having many investors can possibly lead to more noise from pesky and demanding investors who want their say-so in your business affairs.
- Depending on where you’re crowdfunding, you may be on the hook for greater liability as you’ll no doubt take up the mantle of a fiduciary.
- Financial disclosures must be made to investors and government agencies—in the US you can expect to register with the SEC if providing Regulation Crowdfunding.
Are there any regulations or limits I should be concerned about?
Various countries, including the United States, have instituted specific regulations that dictate how businesses and entrepreneurs may raise funds for their business. As such, it is up to platform creators in the US (and respective countries) to understand the regulations surrounding Equity Crowdfunding in particular.
The US JOBS Act, put into law in 2012, opened the door for Equity crowdfunding as we know it today! The bill allows companies to raise money, and they created regulations to manage how companies engage in such activities.
Regulation Crowdfunding allows companies to offer and sell shares (securities) via crowdfunding. The rules: require all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal.
Limit: $5 million per year
Hosted equity platform vs a Self-Hosted white-labeled Equity CrowdFunding platform
Pros of a Hosted Equity Crowdfunding Platform
- Hosted platforms like Thrinacia or SeedInvest are great because they are often easier to start using and get going.
- These platforms often have support for those times when you get stuck or have an issue with a technical problem
- Users needn’t be bothered with the tech stack as it’s all handled by the service provider
Pros of a Self-Hosted and White-Labeled Equity Crowdfunding Platform
- If you Self-Host your Equity Crowdfunding platform, you control the brand look and fee. You control how you accept fees and who you let into your platform
- You own the tech stack for the brave or expert-minded user
- Insurance that you get paid! Some platforms may hold on to any fees you raise, even if your projects fail. When you’re the one running the platform, you ALWAYS get paid.
Examples of Equity Crowdfunding
Equity Crowdfunding isn’t just a buzzword, it’s a tactic (and a successful one at that), it’s a true alternative to the typical way businesses raise capital. This guide would be remiss if it didn’t include examples of successful Equity Crowdfunding campaigns.
Zenefits, a popular online HR Benefits Administrator, raised Raised $372,000 from 10 high-profile, anonymous, investors on the WeFunder platform. It’s important to note they acquired a waiting list of 700 interested users. Their very first Equity Crowdfunding efforts netted them just north of $50,000!
Hello MD raised over three-million from their Equity Crowdfunding efforts.
That Christmas Movie is the world’s first Crowdfunded movie production. That Christmas movie was nominated for four-day-time Emmys and received a lot of acclaim and positive reviews. https://wefunder.com/thatchristmasmovie.
How can you get started in Equity Crowdfunding?
With the rising popularity in Crowdfunding over the last several years, it’s easier than ever.
You can get started with various platforms such as WeFunder, SeedInvest, or Thrinacia.
Alternatively, if you have the patience, technical know-how, or a capable technical team, consider starting your Equity Crowdfunding efforts with IgnitionDeck.
If you buy IgnitionDeck Echelon or Enterprise, you get access to our Crowdfunding Themes. We recommend Multifondo for your Equity Crowdfunding campaigns; it has a modern layout and is integrated with WordPress’s best page builder, Elementor.
⚠️ Disclaimer: IgnitionDeck only manages the website content and transaction processing portion of your business. You need to be aware of and acquire all of the necessary licenses and certifications required by your legal jurisdiction yourself
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