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Equity crowdfunding is a way for a private business to raise funds for their company through online investors. It’s a way for investors, including friends and family, to easily invest in your small business. The funds raised do not have to be paid back. There is no service or products provided either. The investors are often “smaller” investors, although institutional investors can certainly participate. Once an investor provides the funds for the startup, the investor receives a percentage of equity in the company.
You can have the best business idea but if you don’t have the right funding, then it may never go anywhere.
How Equity Crowdfunding Works
Is Equity Crowdfunding Legal?
Yes, equity crowdfunding is legal. It is regulated by the government. It also means there are certain rules and regulations you have to follow, otherwise there are serious consequences to deal with if you don’t adhere to the rules.
For equity crowdfunding to be considered legal, there are a few steps you have to follow, including:
- Working with a broker registered with the Securities Exchange Commission, or SEC to process the transactions.
- You can not accept more than $5,000,000 in crowdfunding investments per year.
- There are limitations to how much an individual investor can invest in a 12-month period, and the amount depends on the investor’s income.
- Follow the rules on financial disclosures to the public.
Who Can Invest in Equity Crowdfunding?
What makes equity crowdfunding different and appealing is the wide range of potential investors. Almost anyone can invest in a company, including an everyday consumer, family member, friends, business partners, or individual investors. Practically anyone who believes in the success of your company can invest. The investors must meet certain criteria though, including income, assets, and employment requirements.
What Can Money Raised through Equity Crowdfunding Be Used for?
Equity crowdfunding is a way to raise business capital. As such, you can use the funds for business-related expenses for the growth of your company. This ranges from equipment and marketing, to research and development.
How Much Money Can You Raise with Equity Crowdfunding?
A company can raise up to $5,000,000 in a 12-month period through equity crowdfunding, according to the SEC.
Who Are the Best Candidates for Equity Crowdfunding?
Equity crowdfunding doesn’t work for every new business or entrepreneur. However, there are certain companies where it is better suited for. This includes businesses with a scalable product, a business with a substantial network of potential investors, and a business that can offer at least 5x or more on returns for investors. Crowdfunding is usually more successful when you have a larger network of family, friends, and individual investors willing to invest.
How Much Equity Do You Give Up in Crowdfunding?
There is no set amount of how much equity you need to give away by raising capital through crowdfunding. There is a wide range of possibilities, but a common amount tends to fall into the 20% to 40% range.
What Happens After You’ve Raised the Money?
After you’ve raised the money, the company may move on to other forms of raising money to bring in funding, such as through angel investors or borrowing with financial institutions. Keep in mind the limitations for equity crowdfunding are based on a 12-month period, so your company can go back for a second or third round of fundraising if desired.
A company could also choose to take the funding and concentrate on the growth of the business, without seeking other funding sources.
Equity crowdfunding is one example of the many funding opportunities available to small business owners and startups alike.
Equity Crowdfunding vs Other Types of Crowdfunding
While the concept of equity crowdfunding may sound straightforward, there are actually several ways to work with investors to raise funds.
Rewards crowdfunding is different from other forms of crowdfunding because you give investors free products or services in exchange for their donations. The range of products and services offered can be as simple or complex as you like, such as an advance copy of a book or gift certificates for future services.
Rewards crowdfunding is a smart option if you need funding and don’t want to take on debt. However, it could take several offers to finally find one that resonates with investors and provides the funding you need.
This type of crowdfunding involves taking out a loan from a crowd of investors, instead of from a traditional bank or lending institution. The benefits are the same as a business loan, where you can use the funds for almost any business expense, but you’ll have a set repayment schedule and interest rate.
The upside to this funding is you may have an easier time securing the funding instead of going through the rigorous approval process of a lending institution. Plus, since you’re repaying the funds, you won’t have to give up any control or ownership of your company.
Donor crowdfunding is when people contribute to your business or cause without expecting anything in return. This may be a parent or sibling giving you money simply because they know how much you want to start your own business. Or, you may be starting a nonprofit or charity organization and there are people who want to support your mission. GoFundMe is a popular example of this type of crowdfunding, but you may be surprised to learn it can be used to start a business too.
How Is Equity Crowdfunding Different?
While all these crowdfunding examples are a way to spread awareness about your organization or company while raising much-needed funds, there is a major difference between these and equity crowdfunding. Equity crowdfunding means you are offering a financial stake in your company in exchange for funds that don’t have to be repaid.
Equity Crowdfunding Pros and Cons
You’ll want to consider both the benefits and drawbacks of using equity crowdfunding to raise capital.
Pros of Equity Crowdfunding
- You may have an easier time raising funds via equity crowdfunding versus a traditional lending institution, such as a bank or credit union
- The debt doesn’t have to be repaid
- The more investors you work with, the more money you can raise, making it a more flexible financing option when you’re unsure of your funding needs
- You still retain control of ownership and can decide how much equity to offer and if you want to maintain majority ownership
- Offers nontraditional investors, such as your network of friends and family, a way to support your business
- You can use a campaign to build excitement around a launch or promotion
Cons of Equity Crowdfunding
- While the cash flow is helpful, you’re giving up your company’s future profit
- You must share your financial information with the crowdfunding company, which means the information can be accessed by the public
- There is no guarantee your business will succeed, even with equity crowdfunding, which means investors will know if it failed
- Crowdfunding platforms charge high fees, up to 15%, plus keep a percentage of the funds
- It takes an enormous amount of time and effort to set up an equity crowdfunding campaign, with no guarantee you’ll raise the money you need
An entrepreneur is someone who has a vision for something and a want to create-David Karp, Tumblr Founder and CEO
Best Equity Crowdfunding Platforms
Here is a summary of some of the most popular crowdfunding platforms for your consideration.
CircleUp specializes in working with brands dedicated to “disrupting the food, beverage, personal care and beauty, pet, and household consumables categories.” The platform offers access to market insights, connecting a company to industry leaders so you can grow in critical areas of the business, and providing post-funding support.
CircleUp partners with brands with revenue between $1 million to $20 million and need to raise money for growth equity.
EquityNet has helped raise over $600 million in capital through their platform and connecting over 200,000 investors to a wide range of companies seeking funding. EquityNet also boasts years of experience, since it was one of the first crowdfunding platforms launched in North America in 2005.
EquityNet works with multiple types of businesses, including real estate and restaurants, software, and pharmaceuticals. It also charges a flat fee to access the funding network, whereas most platforms charge a percentage of the funds raised.
Fundable partners with a variety of U.S.based businesses, including technology, healthcare, and media. The company touts a success rate of raising over $570 million for companies to date. Not only does it offer investors equity opportunities, but it also offers rewards crowdfunding if you’re interested in working with a rewards crowdfunding solution instead.
Fundable uses a different approach with fees. It charges companies a flat fee per month to have access to fundraising capabilities. Currently the fee is set at $179 per month for equity crowdfunding. There are no success charges but you don’t receive any funds unless you reach your campaign goal.
Many may associate equity crowdfunding as only for larger startups but Mainvest is focused exclusively on small businesses across the U.S. It has raised over $15 million in capital for various small businesses and processed over 50,000 repayments to investors.
Because Mainvest focuses on local businesses, it provides a way for investors to “have a say in local economic development.” For the business, the platform doesn't charge any upfront fees to launch the campaign and you only pay if your campaign goal is reached (which is between 4.5% to 9%, depending on if the investors are in or out of the network).
MicroVentures works with all types of businesses but is particularly interested in innovation or companies with a “new spin on old technology.” The company has been in business since 2011 and has strong numbers to back up its portfolio, including helping over 400 raise capital to date. While MicroVentures works with various sizes of companies, it specializes in startups and small businesses who are seeking funding in the $150,000 to $1 million range.
MicroVentures lists a $1,000 required legal review fee for each company it represents and there are other fees associated with marketing costs. If funds are raised, MicroVentures charges a 5% commission and 2% equity in addition to an escrow fee.
Netcapital focuses on tech startups, although it works with various categories of companies too. Netcapital focuses on having a low investment threshold, which is currently a minimum of around $99 for an investor. For fundraising, Netcapital works closely with a company to ensure all paperwork is completed, the marketing is streamlined, and you can maximize your funding potential. You can even interact with investors and potential investors for critical feedback throughout the funding process.
Netcapital charges a flat fee, which covers all the transaction fees necessary from beginning to end. However, the company does advise you to also work with an attorney and accountant if you are trying to raise more than $1 million.
As the name suggests, PeerRealty works exclusively with real estate companies and developers by combining the power of real estate with the innovation of crowdfunding. It gives investors the opportunity to invest in multi-family, retail, office space, or hotel properties. It is run by a team of real estate and finance professionals that have over $1 billion in past experience with real estate transactions.
Republic has offered investment opportunities since 2012 and has invested over $1 billion to date through individual and institutional investors. It works with a variety of companies, from kombucha creators to solar-charging vehicles. However, it has a low acceptance rate of only 5% of startups out of the thousands of applications it receives and advertises a strict vetting process for companies.
If selected, a company works with Republic to raise funds and Republic charges 6% of the total amount raised.
SeedInvest has also offered equity financing investments since 2012 and has helped over 250 startups raise funds. All work is 100% online and includes an impressive portfolio of past clients. Over $465 million has been raised on the platform and there are currently over 700,000 investors, making it a serious player in the crowdfunding platform space.
As of October 2022, SeedInvest was acquired by StartEngine but investments and operations continue as normal while the deal is finalized. Fees vary with the investments but the company does not have to pay any fees (other than transaction fees) if the campaign goal isn’t met.
StartEngine is one of the biggest names in equity crowdfunding and has a huge portfolio of past investments and success stories. StartEngine claims it has raised over $650 million for startups, with over 750 rounds of crowdfunding, and over 1 million users. Another benefit to using StartEngine is your company works with a dedicated team member from start to finish, so you are assisted with everything from filing the paperwork with the SEC to creating the campaign and raising funds.
StartEngine does not charge any upfront fees and works with you to get launched in as little as four to six weeks.
Wefunder is unique because it partners with technology, biotech, and healthcare companies as well as local businesses. Wefunder boasts an impressive number of investors currently at over 1.6 million and has raised over $573 million on the platform.
Wefunder works closely with each company during the fundraising process. It charges a 7.5% fundraising fee, but only if the campaign goal is reached. The good news is there are no other fees either, and the company offers a price match guarantee if you find a better price with another platform.
Turn a perceived risk into an asset-Aaron Patzer, Mint Founder
What to Look for in an Equity Crowdfunding Site
There are numerous platforms to choose from for equity crowdfunding, so you’ll need to carefully research to find the one best suited to your company needs. For starters, look for a platform that specializes or leans towards similar companies as yours. These platforms often have a pool of investors that are specifically looking to invest in companies like yours.
Look for an equity crowdfunding platform that is knowledgeable and transparent about the rules and regulations surrounding the fundraising process. There are multiple rules that must be followed and you want to partner with a company that is understanding of these rules and can advise you along the way.
Lastly, ask lots of questions and pay attention to how the questions are answered. This indicates the level of support you can expect throughout the entire fundraising process, so it needs to be a company you’re comfortable communicating and interacting with.
Keep in mind post-investment support is needed too, so look for a platform that is involved after the fundraising campaign.
How to Get Started with Equity Crowdfunding
The first step to get started with equity crowdfunding is to choose the platform you want to work with. Once you’ve made this critical decision, it’s time to register and get started.
After you register with the platform, it’s time to sell your business idea to investors. This means putting together a potential pitch through a written or video presentation. Work with your platform to determine what the best presentation method is for the potential investors.
Your pitch should include:
- Why you started the project and any personal stories behind the inspiration.
- The mission of the company and the impact you believe it’ll have.
- How the investors will benefit.
- Explain how the funds will be used and why you are depending on the outside funding.
- Your profit margin, your cost of goods, and target market.
- Why your business is unique.
Once your presentation is ready, you will launch your campaign. It’s important to remember you won’t receive your funds until your campaign goal is met, so you should set your goal accordingly and not make it too far out of reach.
Alternatives to Equity Crowdfunding
Equity crowdfunding is not the only option for infusing your business with cash. Before you venture into crowdfunding, you may want to consider if other alternatives are better suited for your business.
Business Term Loans
Business term loans are traditional business loan options from banks or other lending institutions. You can apply for these either through the traditional bank or credit union, or you can use an online financial institution. The funding can be used for almost any business task, from purchasing real estate, building inventory to making payroll.
The terms of business loans are typically straightforward-you receive a lump sum of money from the lender and in return, you must pay back the balance plus interest. The interest rate may be fixed or variable and the repayment terms will be defined for a set period of time.
These loans are similar to business term loans and microloans but as the name suggests, the funds from the loans are specifically used for purchasing equipment related to the business. Equipment is a broad term and can include items like a copy machine to company vehicles. You can generally expect to repay the funds with interest and with fixed intervals.
A business can take advantage of a merchant cash advance, although it is a riskier form of borrowing. With a cash advance, money is loaned to the business based on future revenue. Funds are generally available quickly and can be used for almost any purpose, plus the approval process is quick. However, the interest rates are usually much higher versus other funding options.
A merchant cash advance is a type of cash advance where a business borrows money based on future revenue, but the lender takes a percentage of each of the future sales until the loan agreement has been satisfied.
Business Line of Credit
A business line of credit is a valuable funding option, especially for a business with inconsistent cash flow or if you’re unsure when you’ll use the funds. These are often extended through banks or credit unions, which means the requirements can be strict and cumbersome.
If you’re a more established business, you can benefit from this form of credit because you access the funds immediately and only when you need it, but if you’re a new business then you may find it more difficult to get approval. If approved, the funds can be used for a variety of purposes, from purchasing to payroll.
Commercial Mortgage Loan
A commercial mortgage loan is a loan option if you already have a commercial property in place that you can borrow against. The funds from a commercial mortgage loan are often used to purchase more property, develop or refinance an existing one.
Business Credit Cards
Business credit cards may be a solution if you need a smaller amount of funding for purchases. You can use it to pay suppliers or other expenses, which may be helpful with inconsistent cash flow. A business credit card can help build your credit score (or decrease it) depending on how responsibly it’s used, which could help you get approval for a business loan later down the road. Another added bonus with a business credit card is using one where you earn rewards, such as cash back or points for travel, which could contribute to the bottom line.
Your business can have investors, even without the use of crowdfunding. A private individual or group of people can provide funds for you in return for ownership, or some other financial agreement. The money may or may not have to be paid back, depending on the terms of your agreement.
Venture capital firms are another investor option and the funds are provided in return for a stake in the company. Venture capitalists only invest in companies with a high potential for growth but who may not qualify for traditional lending options.
Equity crowdfunding is one financing solution of many for startup companies. It can provide a much-needed infusion of capital to get your business off the ground. However, it comes with numerous risks and you should carefully consider which equity crowdfunding platform you partner with, which can make all the difference to your success.