What is Equity Crowd Funding?
Equity crowdfunding, investment crowdfunding, crowd investing or crowdequity all refer to the same thing. It is part of the capital markets due to its association with private company securities and investment. Equity Crowdfunding is an online entity which enables individuals and accredited investors to put money into a business, usually a start-up enterprise, with the promise of future returns in the form of shares. As such, it is subject to financial and securities regulation. In the UK, this comes under the umbrella of the Financial Conduct Authority.
How Does it Work?
The online mechanism enables broad groups of investors to fund small businesses and startup companies in return for equity. The investor receives a portion of the shares of the enterprise. The value of the equity increases as the stock portfolio improves and the business grows financially. The potential for growth comes when the company is nascent; follow on funding for future growth may come from a different source.
Investment crowdfunding is either equity or debt-based (or another model such as profit sharing). Crowdfunding became known as a way to get start-up capital in 2009. These days, it has taken the form of selling equity on the same platform as both equity or debt-based crowdfunding.
Who Uses Crowdfunding?
Crowdfunding appeals to two separate markets:
- a business needing finance, and
- an individual or company with money to invest
Not Only for Start-Ups
This method of raising money through the sale of equity often assists a business to get started on a new product or service, through the sale of equity rather than take out a loan. The process allows for a wider scope in raising financial capital over the traditional lending through a bank or financial institution.
The programme is realistically not suited to existing businesses who do not have a minimum of 2 years trading history. The businesses who have an industry background of success find Equity Crowdfunding one of the most simple forms of raising capital for future ventures and company growth.
Pros and Cons of Equity Crowd Funding
- The ability to raise funds quickly on websites without having to agree to fund-raising obligations set by venture capital firms
- Can help raise awareness for new businesses
- No upfront fees
- Investors can track your progress and may assist with brand promotion through their networks
- An alternative option for enterprises that struggle to get bank loans or conventional funding
- Without Patents and Copyright protection, a company stands to lose a great deal when exposed to a large group such as a crowdfund
- Crowdfunding appeal more to consumer products rather than startups with B2B (business to business) strategies
- There is more expertise for start-up enterprises with angel investors and venture capitalists than with crowd-funders
- The overall risk of failure by the company to grow and succeed means that an investor has the potential to lose all