What is Equity Crowdfunding and How Can You Use it For Your Business?

Creating a successful startup is hard; it’s even harder without access to startup funds. However, if you’ve got a great business plan and the ability to create a buzz around your brand, equity crowdfunding could be the perfect option for your business.

New legislation is opening up this crowdfunding option and making it a more viable method of raising capital for thousands of businesses.

An Overview of Equity Crowdfunding

Equity crowdfunding enables members of the public to invest in a privately-owned company. An entrepreneur or a business, generally a startup, will use an equity crowdfunding platform to offer securities in return for an investment from members of the public.

Most commonly, that security will be in the form of shares, and as the company grows and prospers, the value of those shares increases, offering the investor a return on their investment.

Why is this important for businesses?

If you’ve ever started a business, then you know it’s not straightforward, and one of the biggest challenges is raising funds to get your company off the ground. In the past, if you wanted to raise funds through members of the public, then you would need to find a venture capitalist or angel investor (people with a net worth of at least $1 million, or with an annual income of at least $200k).

However, the introduction of the JOBS Act in 2012 opened the door for privately-owned companies to raise capital through regular members of the public.

On the other side of the equation, equity crowdfunding allows regular investors to get in on the ground floor of a business opportunity. Even the biggest companies in the world like Google and Amazon started off life as startups, and with equity crowdfunding, regular people have the opportunity to invest right at the beginning of a future Google’s journey.

For every Google or Amazon though, there are endless examples of startups that fail. In fact, the 2019 failure rate for startups was 90 percent, so investing through equity crowdfunding is a risk.

Trends in Equity Crowdfunding

Many of the trends in equity crowdfunding stem from a need for consumer protection. When you invest in publicly-traded companies, you’re investing in an established, highly-regulated business, but it’s not necessarily the same story with equity crowdfunding.

It takes vast resources to become a publicly-traded company though, so it’s out of reach for startups and small businesses. Instead, they turn to alternative means of raising capital, such as equity crowdfunding, and while this offers regular investors great opportunities, it can also open them up to great risk.

This is why investing in startups was previously reserved for venture capitalists and angel investors because they were seen as having the means and experience to manage that risk. However, cutting the regular investor out of these options also created a two-tier system, where savvy investors couldn’t get in on enterprising startups.