Crowdfunding is an effective tool for businesses to raise capital. More people are getting involved in this method because it provides business owners with multiple sources of funding, rather than relying on one source that may or may not be there when needed.
Equity crowdfunding is a campaign that runs on an online platform where anyone can become an investor in an early-stage or established company. Investors enjoy the benefits of equity crowdfunding by receiving stocks in return for their investments.
This is quickly becoming a common method among small businesses seeking to raise capital without involving banks or other lending institutions. Now more than ever, are looking to become involved in equity crowdfunding, which is why it’s important to know the common questions about equity crowdfunding people.
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Equity crowdfunding is a new way for companies and individuals to raise money. Crowdfunding is the practice of funding a project or venture by raising many small amounts of capital from a large number of people, typically via internet platforms. Equity crowdfunding involves the same process but with equity (ownership) in place of cash. This means that when you invest in an equity crowdfunding campaign, you are buying shares in the company. In return, you’ll be entitled to a portion of whatever profits the company makes in addition to voting rights and other governance decisions.
Equity crowdfunding has various benefits that make it more appealing than traditional funding methods:
It’s accessible: With equity crowdfunding, you don’t need to worry about the size of your initial investment. Often with crowdfunding, even if you can afford a bigger investment, you’re limited in how much you can invest. However with equity crowdfunding, no such limit exists.
It allows more investors: with traditional forms of fundraising such as venture capital (VC) or business angel investment, only a small number of wealthy people have access to investing.
It’s more transparent: with equity crowdfunding, companies are required to disclose their financial situation and future plans in order to get funding. In contrast, with traditional forms of fundraising such as VC or business angel investment, investors typically have very little information about the company they are investing in.
It’s liquid: With equity crowdfunding, if you believe that the company is not going to succeed then all you have to do is sell your shares at their current market value. In contrast with traditional forms of fundraising such as VC or business angel investment, investors are often forced to hold onto their investments for years until an exit is possible.
It’s riskier: The flipside of equity crowdfunding is that if you invest in a company and it fails, then you may lose all your investment. In contrast with traditional forms of fundraising such as VC or business angel investment, failure means that investors can hold onto their shares and salvage some value from them.
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If you have the money then investing in equity crowdfunding is better than not investing at all, but whether or not you should invest depends on your goals and willingness to take risks. Even if the market shows strong growth, equity crowdfunding is still a risky investment and the majority of companies may fail. If you invest in equity crowdfunding, it’s advisable to set yourself a limit on how much money you are willing to lose before cutting your losses.
The major players in equity crowdfunding are Seedrs, Crowdcube, Syndicate Room, Seedrs, Crowdcube, WeFunder, StartupEngine and The Crowdfunding Centre. The platform you use will depend on the type of investment you want to make.
There are also equity crowdfunding platforms that allow you to invest for debt and equity, such as Crowdstacker and CrowdfundX . These platforms will help you connect with venture capitalists who can provide funding for your business idea if their terms appeal to you.
You will need to use one of the platforms listed above. To get more information about investing in equity crowdfunding, you’ll have to contact them directly.
If you do not qualify as an accredited investor, then your only other option is to receive a referral from someone who qualifies as an accredited investor. The easiest way to proceed would be to check out websites such as AngelList.com which will allow you to look up those looking for referrals.
Some tips when looking at companies that are raising money through equity crowdfunding:
Don’t invest more than you can afford to lose. Keep in mind that equity crowdfunding is riskier than traditional ways of investing money, such as savings accounts or ISAs.
Look at the team behind the company and listen to their marketing strategy for raising funds. You may be able to get a better picture of how confident they are of reaching their target, and how likely they are to succeed.
Choose companies that you’re really interested in and get involved with them before they start crowdfunding. If you like the company’s concept and its team, then wait until the crowdfunding campaign starts to invest because chances are you’ll be able to invest at a lower price than during the campaign. However, if you hear about the company after it’s started its crowdfunding campaign, you may have missed the chance to invest at a lower price.
Like all investments, equity crowdfunding can give investors a high return but it also comes with considerable risk. If you’re unsure of whether investing in equity crowdfunding is right for you, don’t hesitate to contact a financial adviser or tax advisor for more information.
If you are used to investing in other forms of crowdfunding, be aware that equity crowdfunding comes with differing legal responsibilities for investors and companies. Some of these include shareholder rights, investor agreements, directors’ duties to their shareholders, detailed disclosures under the AIM Rules, etc.
Make sure you read the company’s legal paperwork before investing, so you understand all of your rights as an investor. Always ensure that you are happy with the terms of the investment agreement before signing it.
Have more questions?
If you have any questions about equity crowdfunding, or you’re interested in launching a campaign, speak to one of our equity crowdfunding consultants.