Equity Crowdfunding: The Future of Financing

September 20, 2021

Image credit: Lovefreund

Equity Crowdfunding: The Future of Financing

The past can be a nostalgic place, although when it comes to financing startups, it can also be a place of missed opportunities – businesses that never got off the ground because they lacked the investment they desperately required. 

Luckily, the present is much brighter for startups, with equity crowdfunding proving hugely 

beneficial to entrepreneurs looking to bring their visions to life. 

We believe that equity crowdfunding is undoubtedly the future of financing – and this article explains why.

What is Equity Crowdfunding

First, let’s return to the past. Years ago, the go-to methods of generating capital were to ask friends and family for money, or – for larger business ideas – to head to the bank for a loan, or seek an investment from an accredited angel investor.

If you could lure and hook an elusive angel, then the world was your oyster – you would have significant investment and expertise, albeit in exchange for an equally significant portion of your business. 

These days, things are different. Equity crowdfunding now proves one of the best ways for startups to raise the capital they need to start their businesses, whether that’s a local plant-based milkshake bar or a cutting-edge fintech platform. 

But what exactly is equity crowdfunding?

Equity crowdfunding is essentially an investment round with the public – allowing everyday people to invest smaller sums of money (as low as $100) in your business, via online platforms such as Wefunder, Republic, and StartEngine.

These small investments can lead to huge amounts of money for startups. For example, in 2017, the entertainment company Meow Wolf raised more than $1.3 million from 621 investors. This is just one of many success stories.

Why is Equity Crowdfunding So Popular?

Since the slow birth of equity crowdfunding in around 2009, this method of investing has now overtaken angel investing in terms of annual funding. 

The Covid-19 pandemic accelerated the need for this kind of remote investment method, saving great time and effort on the part of the entrepreneur. 

It is easy to see why equity crowdfunding has become so popular with both businesses and investors:

Volume of investors. Equity crowdfunding pairs businesses with thousands of people who are actively looking to invest. Instead of having to manually search for investors, equity crowdfunding brings them to you. For example, on Wefunder alone, more than 1.4 million people have invested in companies on the platform. 

Raise significant capital. Until recently, the funding ceiling for businesses raising money via equity crowdfunding was set at $1.07 million in a 12-month period. However, in 2021, the Securities and Exchange Commission (SEC) raised the limit to $5 million. This increase opens the doors to companies at different stages of their development.

Generate new customers. Businesses can enjoy the fact that, in addition to raising investment dollars, each investor also becomes a customer and ambassador for their products or services. If you can attract hundreds of investors, suddenly you have hundreds of new customers, all ready to share your story and product.

Stay in control. Equity crowdfunding allows you to retain control over the terms of investment, including your objectives, your company valuation, and how much capital you wish to raise. Because of the nature of this style of investing (i.e., more investors making smaller contributions), you always retain the majority share.

Start with less effort. With equity crowdfunding, there is no need to meet and pitch to each investor. Entrepreneurs simply create a business plan, upload it to one of the aforementioned platforms, and passively watch the investments arrive.

Remote funding. In the past, to raise significant capital, you would have had to have been based in a large city like New York. With equity crowdfunding, it doesn’t matter from where you run your business, you will be able to connect with investors.

How Equity Crowdfunding is Regulated?

Equity crowdfunding is made possible with Regulation Crowdfunding (Regulation CF) of the Jumpstart Our Business Startup Act (JOBS Act), which came into effect in 2016. 

This regulation meant that eligible companies were able to offer and sell securities through crowdfunding, and investors no longer had to be accredited. This means that anybody was able to become an angel investor and participate in private market deals, investing up to $2,200 per year.

In addition to Regulation CF, the SEC regulates the crowdfunding market in the United States with two other regulations – Regulation A (and A+) and Regulation D.

The differences between the three come down to factors such as how much companies can raise under each regulation; who the company can solicit their offering to; and who is eligible to invest in their offering, among other things.

For example, compared to the $5 million of Regulation CF, Regulation A allows companies to raise up to $75 million, while Regulation D has no upper limit. 

While Regulation CF can entice anyone to invest, only accredited investors with $1+ million in net worth can invest in companies using Regulation D. 

The list of differences goes on. In short, if you are a startup looking to raise up to $5 million, Regulation CF is your route to success. 

The Future of Equity Crowdfunding and the Future of Financing

Equity crowdfunding is growing, and – if you have read this article – this should no longer be a surprise to you.

According to a report published by Crowdfund Capital Advisors, Regulation CF has meant that – since 2016 – a total of $500 million has been raised for 2,600 companies from 700,000 investors, and no fraud has been reported.

As with any form of investing, equity crowdfunding has its critics, with concerns over possible overinflated valuations of some companies, unrealistic forecasts, and the lack of investor protection on some platforms.

Yet, providing equity crowdfunding can reflect and evolve, and platforms mature as quickly as markets, it will remain one of the best routes for budding businesses for decades to come.