Equity crowdfunding is the practice of allowing larger groups of people to invest, as one, in early-stage start-ups.
In exchange for doing so, they receive a small bit of ownership — equity — in the company.
If you’re an investor looking to get into the venture capital game and increase your net worth, these investment opportunities provide a lower risk way to participate without a ton of money.
For business start-ups, equity crowdfunding sites allow you to connect with early-stage investors and to do so without having to go through the traditional venture capital process.
Equity crowdfunding is a regulated practice, however, and understanding those regulations can help you figure out if equity crowdfunding is viable for you, as an investor or as a small business owner.
In this article, we’ll give you a comprehensive guide to equity crowdfunding and a brief rundown of the regulations surrounding the practice.
Then we’ll walk you through why a start-up founder might want to work with a crowdfunding group and finish up with a look at the 6 best equity crowdfunding sites for 2019.
What Is Equity Crowdfunding?
Equity crowdfunding is when early-stage companies go to the general public for the purpose of raising capital.
On equity crowdfunding platforms, potential investors can look at private companies’ business plans.
If a critical mass of them decide it’s a viable business with growth potential, they can act as angel investors and provide venture capital to start the company.
In doing so, these investors will be granted a small ownership stake in the new business.
Equity crowdfunding is slightly different from other crowdfunding campaigns that may offer rewards to people who invest money (Kickstarter and GoFundMe work like this).
Other crowdfunding sites allow a group of people to essentially loan a small business money and then get paid back with interest in a certain amount of time, often a 12-month period.
In equity crowdfunding, groups of backers actually become stakeholders — part owners in the company — which will entitle them to major gains (or potential losses) moving forward.
Because of this, equity crowdfunding comes with a bit more regulation than other crowdfunding sites.
Real Estate Crowdfunding
Slightly different from equity crowdfunding is real estate crowdfunding, which allows people to band together to invest in real estate projects.
These groups form real estate investment trusts (REITs), which can purchase property, lease out units, or simply hold land and allow it to appreciate.
Equity Crowdfunding Regulation
Equity crowdfunding can run afoul of several laws set forth by the Securities and Exchange Commission (SEC), which generally prevents companies from soliciting capital investments from the public.
These laws exist to protect inexperienced investors, who may not be able to do the due diligence that professional venture capitalists can do, and who are, therefore, more susceptible to fraud.
That being said, there are exceptions that allow people to group together and invest in early-stage companies.
One of the ways to get around these laws is for an intermediary to register as a broker-dealer, or as a funding portal, with the SEC.
They must also become a member of a national securities association (referred to as FINRA).
Another way is to only work with investors who have been accredited by the SEC.
There used to be several exceptions to SEC laws regarding crowdfunding (Regulation A and Regulation D of the Securities Act of 1933), but those were updated in 2015 with the introduction of Regulation Crowdfunding (Regulation CF), which created certain crowdfunding allowances, specifically online crowdfunding allowances, as part of Title III of the JOBS Act.
Basically, raising money from groups of people online in exchange for equity is now possible.
But any site you work with will either need to ensure that you are an accredited investor or will need to have another way of complying with SEC regulations.
Because of this, some sites — like Indiegogo — have exited the equity crowdfunding space and now only focus on other kinds of crowdfunding.
Why Use Equity Crowdfunding as a Start-Up Owner?
If you have a small business idea and need seed funding, equity crowdfunding can be a great way to get around the traditional venture capital process.
Traditional VC firms are often looking for what are known as “whales” — companies that have the potential to earn them back many, many times their investment.
Thus, if your company has more modest goals or may take some time to get extremely profitable, traditional VC firms may not be interested in working with you.
Crowdfunding sites like Kickstarter and GoFundMe allow you to maintain full ownership over your business, but to attract attention to your campaign, you may need to make promises to investors that are tough to keep.
These sites have donor levels that come with certain rewards, which may be something small like early access to your product.
If that’s the case, it limits your ability to pivot your product to something that might work better because the Kickstarter investors are all expecting a reward for what they pitched in for.
If your business changes, they may still want what they were originally promised, whether or not it makes sense for your business to produce it.
Equity crowdfunding can also allow you to avoid putting early expenses on credit cards with high, unforgiving interest rates.
Plus, you’ll be bringing in a group of people who believe in your product and are invested (quite literally) in its success.
You won’t own 100% of your business anymore if you bring in an equity crowdfunding group.
Likewise, a group of people may have a differing set of priorities than one or two investors.
This can allow you to avoid a finicky partner who changes his or her mind about what a business should be, but it does allow for quite a bit of noise if there are factions within the group who have differing ideas for a business.
6 Best Equity Crowdfunding Websites
Below are some of the best online platforms for investment crowdfunding in 2019.
Some of these require all investors to be accredited, while others allow anyone who signs up to participate on the investment side.
And they’re always looking for new business plans to evaluate if you’re a small business owner.
SeedInvest is an equity crowdfunding platform that pairs start-ups with investors online.
They work with accredited investors, focusing their platform on attracting existing venture capital firms or people with a high net worth.
Wefunder allows unaccredited investors, using a provision of the 2012 JOBS Act to permit such investors to provide equity.
If you’re looking to get into group crowdfunding and are not accredited, it can be a good platform.
StartEngine is another investment crowdfunding platform that allows anyone, accredited or not, to offer investments in start-ups.
They allow investments for as little as $100 and allow small business owners to raise as much as $50 million in capital.
Crowdfunder only works with accredited investors but boasts a community of over 15,000 of them, all working alongside a group of renowned lead investors who make major decisions on start-up capital.
They advertise that they’ve built a start-up community of 200,000 entrepreneurs who have brought business ideas to the platform.
Fundable is another equity crowdfunding site that only works with accredited investors but has invested in many exciting start-ups.
The site is linked with the start-up university, Startup.com and often gets first crack at the best ideas that come out of the school.
CircleUp has worked with consumer brands like Halo Top Creamery, and other exciting up-and-coming businesses, on equity crowdfunding campaigns.
They work with accredited investors, known as “growth partners,” who can apply by emailing CircleUp Growth Partners at [email protected].
Using Equity Crowdfunding to Start a Business
Equity crowdfunding is a tricky practice as the SEC has several regulations in place to protect un-accredited investors.
For companies that work with accredited investors, however, or have found exemptions, equity crowdfunding can be a great way to bring in a diverse group of people to invest in the early stages of a start-up company.
Whether you’re a budding investor or a small business owner looking to find investors, equity crowdfunding may help, and these six websites are good ones to look into to get started.