Here we are, five years after Title III of the JOBS Act came into effect, opening avenues for every American to invest in private companies regardless of their net worth. More than $514 million has been raised since 2016, and this amount is expected to dramatically increase in 2021 as a result of the new SEC regulations that went into effect on March 15. We’ve seen a significant increase in equity crowdfunding operations not only in the United States but across the world as a result of these modifications.
Despite its popularity, there have been apprehensions among people regarding equity crowdfunding. It is not as complicated as it sounds. However, despite the heaps of information available around it, a fair number of myths are floating around. Some of these are due to misinformation while the rest has been due to evolving financial instruments and changing policies around equity crowdfunding.
Therefore, now is the perfect time to blow the dust off some myths regarding the equity crowdfunding sector.
Common Equity Crowdfunding-Related Myths
“Equity crowdfunding is risky.”
One of the most common equity crowdfunding myths has to do with risk. For some reason, people are under the impression that equity-based investments are high risks. This might have something to do with how Wall Street views equity-backed securities compared to other forms of investment instruments like bonds and mutual funds.
Equity crowdfunding is a relatively new form of investment. However, equity-backed securities have been around for decades and they are not as much riskier than other types of investments.
“Only a handful of equity-based crowdfunding platforms exist.”
Another equity crowdfunding myth is that there are only a few equity-backed securities platforms out there. While it’s true that equity financing options might be limited compared to the number of donation and reward crowdfunding operations, this does not mean they don’t exist at all.
There are equity-based crowdfunding platforms all over the world. In fact, equity financing is an increasingly popular option among entrepreneurs and investors alike as it provides a way to take advantage of growth opportunities that might not be available otherwise. It also gives companies access to the funding they would have never had without equity-backed securities in place.
Some popular equity crowdfunding platforms include:
“Equity Crowdfunding is just for big companies.”
Although a clearly defined development path gives companies an edge in equity crowdfunding, it is not the only determining factor for equity crowdfunding. In fact, companies that have the potential to change the status quo of industry are seeing very early-stage interest by investors as well as firms with highly credentialed founders.
Being revenue positive is also not a requirement to getting crowdfunded. If you have a realistic growth plan with a compelling roadmap to profitability, you can still get crowdfunded.
“Equity Crowdfunding is just like Venture Capital”
Equity crowdfunding is often thought to be just like venture capital, but equity crowdfunding is very different. Crowdfunding does not require an investor to have a minimum amount of money or any prior knowledge about investing in startups.
Crowdfunding investors are able to purchase equity stakes in the company they invest in, unlike Venture Capitalists who typically do not invest equity stakes in startups.
There may be a longer explanation of the differences between venture capital and equity crowdfunding, but one distinction stands out: Entrepreneurs using equity crowdfunding platforms may raise money on their own terms, whereas venture capital negotiations are usually closed in favor of the investor. While your campaign conditions will need to be enticing enough to attract supporters, you’ll be in command.
“Equity Crowdfunding should be your last option”
Equity Crowdfunding is many things but the last resort. Many startup owners find it more beneficial to raise funds via equity crowdfunding in the early stage. All you need is a successful campaign that offers you valuable growth capital, demonstrates market appeal, and establishes a trend for your valuation ask—all of which will give you more opportunities to negotiate if you seek angel investors for your next funding round.
We hope this blog post has made equity crowdfunding a little less daunting. If you are looking to raise capital for your startup through this route, contact our team of equity crowdfunding consultants today.