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Equity crowdfunding lets you raise money from many different investors in exchange for a small piece of equity in your business. Until 2016, equity crowdfunding was only available to certain types of investors. Now, however, there are different types of equity crowdfunding that work for a variety of investors and small businesses alike.
- How Does Equity Crowdfunding Work?
- Equity Crowdfunding Platforms
How Does Equity Crowdfunding Work?
Similar to reward-based crowdfunding, equity crowdfunding allows you to raise money from many investors, but in exchange for ownership instead of rewards. Each individual who invests in your company will get a small piece of ownership or equity in your company. Equity crowdfunding is sometimes referred to as crowdinvesting, investment crowdfunding and crowd equity.
Equity crowdfunding has been around for awhile, but it was previously only limited to accredited investors. Accredited investors are generally defined as any individual who makes at least $200,000 per year (and has done so the past few years) or who has a net worth of at least $1 million. With the passage of the JOBS Act in 2012, equity crowdfunding was opened to all investors, regardless of net worth or income, in May 2016. Based on rules from the Securities and Exchange Commission (SEC), there are a few different types of equity crowdfunding, which we cover below.
Regulation D Equity Crowdfunding
In Regulation D, there are no limits on the amount of money a company can raise or the number of investors. However, investors must be accredited. Before the JOBS Act was passed in 2012, this was the standard form of equity crowdfunding available to companies and businesses.
Regulation A+ Equity Crowdfunding
Regulation A+ is sometimes referred to as a “mini-IPO” as companies can raise between $20 and $50 million from unaccredited and accredited investors. Companies pursuing Regulation A+ are allowed to “test the waters”, meaning they can solicit interest from investors before beginning fundraising. This lets business owners see if there is any investor interest for their product or service. One drawback to Regulation A+ crowdfunding is that companies are required to get pre-clearance from the SEC and get an audit on financial statements for the past two years. Fees for Regulation A+ crowdfunding can also be high, sometimes more than $10,000.
Regulation CF Equity Crowdfunding
Many of the most popular equity crowdfunding platforms operate under Regulation CF. Regulation CF allows companies to raise up to $1 million in a 12-month period from unaccredited and accredited investors. This type of crowdfunding must be done through a “funding portal” (i.e., a crowdfunding platform) or a broker-dealer. You will be required to fill out a form with the SEC, but there’s no substantial pre-clearance required. Depending on the amount you raise, you will also be required to submit reviewed or audited financial statements for the past two years. There are also restrictions on how much an investor can individually contribute in a 12-month period.
Pros and Cons of Equity Crowdfunding
Equity crowdfunding can be a great debt-free way to raise capital; however, you will be giving up ownership in your company for every investor you take on.
- Debt-free way to raise capital
- Ability to get more funds than through a loan
- Gain brand recognition and free marketing for your company
- No credit checks, collateral or personal guarantee required
- Ability to raise more money due to larger number of investors or accredited investors
- Good for idea stage businesses with high growth potential
- Crowdfunding investments may be pooled into a single investment, streamlining paperwork
- Giving up pieces of ownership in your business (consider reward crowdfunding or a loan instead)
- Will be required to provide audited financial documents to investors (may require you to hire an accountant)
- Can only raise $1 million in a 12-month period through Regulation CF equity crowdfunding
- Some types of crowdfunding come with high fees
- May find it difficult to raise money from traditional venture capital sources later on
- Regulated by the SEC so mistakes/errors could cost you heavy fines
Equity Crowdfunding Fees
Platforms will either charge a monthly subscription fee or take a commission based on the amount of money raised. Some platforms will charge additional fees for legal expenses, due diligence, escrow, marketing or listing.
|Monthly Fee||$179 - $399+|
|Commission on Amount Raised||5% - 8%+|
|Additional Fees||$200 - $4,000|
Equity Crowdfunding Platforms
With opening up of equity crowdfunding to all investors in 2016, there are many different platforms you can use. We take a look at some of the top ones.
EquityNet is a subscription based platform that does not charge a commission on funds raised through its website. Subscription fees start at $300 per month. Popular industries on EquityNet include pharmaceuticals, food services and agriculture, hotels and hospitality and financial services.
Similar to EquityNet, Fundable does not charge a commission on funds raised as it is not a broker-dealer. Instead, a monthly subscription begins at $179. Companies that have received a lot of funding on Fundable include companies in software, real estate, gaming, consumer products and pet services and products.
CircleUp is focused on consumer product and retail companies. On average, companies close funding rounds within two to three months with $1 million raised. CircleUp does take a commission based on the amount raised, but there is no charge to apply or be featured on the website. Only accredited investors can invest through CircleUp, so the average investment size is quite high at $100,000.
Crowdfunder is also a subscription based platform, with fees starting at $399 per month. Only accredited investors can use Crowdfunder, so average investment amounts will likely be higher. Popular industries on Crowdfunder include consumer products, software, health, payment processing and food products.
WeFunder is a commission based equity crowdfunding platform, charging 6% on the amount raised. There is also a $195 listing fee to enable fundraising for your business. If you don’t want to make your own profile, WeFunder can make it for you to the tune of $2,995. You must raise at least $20,000 on WeFunder to be able to keep the funds.
SeedInvest is another commission-based platform, taking between 5% to 7.5% of the amount raised. There may also be fees for warranty coverage up to 5% of the amount raised and due diligence, escrow and legal expenses up to $4,000. SeedInvest primarily looks for technology and consumer product businesses.