Equity crowdfunding (also defined as crowd-investing or investment crowdfunding) is a form of capital raising used by start-ups and unlisted companies (a company that is not listed on a stock market). In general, equity crowdfunding involves selling a company’s shares to a group of potential investors in return for money. Each investor is entitled to a proportional share of the business based on their investment.
Other types of crowdfunding, such as rewards crowdfunding and donation crowdfunding, are not the same as equity crowdfunding. By selling financial securities to investors, the model offers a more traditional capital-raising approach.
The primary goal of equity crowdfunding is to collect the necessary funds by soliciting small contributions from many people.
The primary goal of equity crowdfunding is to collect the necessary funds by soliciting small donations from many people.
Advantages of Equity Crowdfunding
1. Easier Access to Capital
Compared to traditional forms of capital raising, online crowdfunding platforms enable entrepreneurs and businesses to showcase their ventures to many potential investors.
Equity crowdfunding is a modern way of investing and raising money. It has several advantages for both businesses and investors.
2. Management is under less pressure
Unlike traditional investment types like venture capital, equity crowdfunding does not result in a company’s power being diluted. Despite the increased number of shares, the presence of many investors means that control is not concentrated in the hands of a small number of shareholders.
3. Profitable returns
Even though start-ups are inherently risky, there is always a chance that a business will become a unicorn and provide investors with extremely lucrative returns.
Who is qualified to invest?
This is dependent on the investment platform. Equity crowdfunding is most often done online through equity investing sites, providing both individual and EIS investment opportunities. The investment requirements differ from platform to platform, so make sure you do your research until you invest.
Some sites only require a few tests to register as an investor, while others have more rigorous requirements. Self-certification is often used to inform an investment platform that you have the necessary expertise, risk tolerance, and financial resources to invest in early-stage companies.
Risks associated with Equity Crowdfunding
- Equity dilution.
- Higher risk of failure.
- It can take years to get a return.
- Often results in low liquidity.