- Company shares (equity) are offered to investors from ‘the crowd’
- Increasingly important financing option for start-ups
- Approaches to regulation varies from country to country
- Less strict accounting standards required than for public companies
- Many countries are looking at new legislative/regulative models
Equity Crowdfunding is the process whereby people (the “crowd”) invest in an early stage unlisted company in exchange for shares in that company. Creators (entrepreneurs, SMEs etc.) offer ownership in their business ventures in the form of shares. Investors buy the shares, and their investment is used to grow the venture. The value of the shares follow the venture’s value – if it does well, so does the investment…
Equity Crowdfunding mechanism enables multiple investors to fund start-up companies and small businesses in return for equity (Shares) in that company. If the business succeeds, then its value, and the value of the equity investment, goes up but the converse is also true.
Equity Crowdfunding displays greatest potential with start-up businesses that are seeking smaller investments to achieve establishment, while follow-on funding (required for subsequent growth) may come from other sources. Equity Crowdfunding also displays good potential as follow-on financing after a successful Reward Crowdfunding campaign, when the company has a strong online presence and fan base.
Equity Crowdfunding is also referred to as Crowd investing, investment Crowdfunding, or Crowd equity. Since 2009 this form of alternative finance has become increasingly important for start-ups. In general Crowdfunded businesses do not have to adhere to the strict accounting standards required of public companies. Because equity Crowdfunding involves investment into a commercial enterprise, it is often subject to securities and financial regulation which offer some protection to investors. However, Crowdfunding regulation is still playing catch-up to the evolving crowding landscape so approaches may vary from country to country, and platform to platform.
The main challenges for a company looking to raise finance through this means will include the following;
- Attracting quality investors (many Crowdfunding investors may have no experience in making such investments
- Managing co-investment between multiple investors with different motivations for investing, and ensuring that dealing with many shareholders does not become a burden
- Platforms also face a number of challenges as Equity Crowdfunding develops and evolves. These challenges will include:
- How to stimulate the ‘crowd’ and in particular ‘High-Calibre’ investors. Platforms see the right mix of professional investors and risk capital providers, and ‘crowd’ investors
- How to ensure company valuations are realistic and equitable
- How to vet businesses and prevent fraud, especially difficult for new start-ups with little or no trading history
- How to keep up to pace with the evolving regulatory/legislative environment
- How to cope with cross-border investing.