Equity Crowdfunding Has a Firm Footing in The World of Finance.
What is Equity Crowdfunding and How Does it Work?
Equity crowdfunding is a method of raising capital online from investors in order to fund a private business. In return for cash, investors receive equity ownership in the business. Equity crowdfunding happens on online platforms where businesses create profiles that include their pitches, financial statements and other information. Increasingly, equity crowdfunding campaigns self-hosted on the company’s own website.
Equity crowdfunding represents the latest way forward for founders, startups and serial entrepreneurs to raise the capital needed to fund their vision. For investors, it gives the little guy – John or Jane Doe – the opportunity to invest in promising hot startups. Until equity crowdfunding came to be, that door was closed to the public and only accessible to an exclusive club of venture capital and angel investors. Knightscope’s IPO is a case study in this and they did StartEngine proud. Their little security robots are popping up all over the country at casinos, on college campus and lots other public places to protect the health and safety of the public.
What Equity Crowdfunding Isn’t
Equity crowdfunding is not the same as a crowdfunding campaign you might have seen on Kickstarter or Indiegogo although the core principals are the same; Investors (backers) give their money in exchange for an investment (perk).
Equity crowdfunding doesn’t always mean the investor gets stock or other forms of ownership. Some variants include a simple share of profits, convertible notes and other creative forms of raising capital.
Although it’s a strategy to consider, not every company will benefit from this model. Entrepreneurs who are interested in equity crowdfunding would be smart to weigh the pros and cons:
Selling shares to multiple investors will raise capital needed..
Equity platforms aggregate multiple investors’ money , streamlining the accounting and financial reporting.
No loan repayments or debt-related credit checks required.
Potential buzz about your business and connections to potential customers.
Selling part of your business could be problematic if investors want a say in your operations.
You’ll need to spend time and money creating a persuasive presentation that includes a pitch deck, marketing plans, financial projections and even a video that communicates the value of your idea.
You have to comply with state and federal security filing rules. You also have a fiduciary duty to tell shareholders about the health of the company.
Similarly, investors have one huge pro and one terrifying con. Pro – You can get very rich if just oue out of ten of your equity crowdfunding investments hits it big (examples – IPO, acquisition, develops cure for cancer, etc.) Con – You can lose 100% of your investment faster than you ever thought possible, often with you sitting on the sidelines like a helpless spectator.
Is This Kind of Crowdfunding Legal?
Absolutely. All such crowdfunding activity is under the purview of the SEC and FINRA. registered with the Securities and Exchange Commission (SEC). There are limitations on contributions from individuals to protect them from getting “overly enthusiastic” about investments. Companies are limited in how much they can raise, but it’s still a hefty sum – up to $50 million in a 12-month period, depending on which tier of fundraising you go for (all of which are regulated by the SEC). Companies must be based in the U.S. or Canada.
Companies must regularly file paperwork so as to remain SEC compliant in addition to very clear rules and regulations surrounding every aspect of their crowdfunding offering. FINRA oversight always keeps companies. Both of them can impose heavy fines and even pursue criminal prosecution of bad actors through the Federal Bureau of Investigation and the Department of Justice.
How to Get Started
If you’re a company interested in raising capital you need to peruse the various sections of this website yo gain a broader understandings of this type of raising capital. You should then consult with an attorney familiar with crowdfunding for first steps and best practices. Vetted professionals with verified credentials are listed along with lots of other useful information in our resources section. Before you start ont on your journey of discovery make sure you’re not broke otherwise you’re wasting your time. That’s because you’ll need thousands of dollars for attorney services, preparation of certified financial statements prepared by a certified public accountant with enough left over for crowdfunding marketing then don’t waste anybody else’s time either as a broke, tire-kicking information gatherer. Nobody works for free and nobody will accept your company’s stock in lieu of cash. The number one reason why crowdfunding campaigns fail to reach their financial objectives is beause they run out of money before the campaign is over. Don’t let this happen to you.
“The money is made in investments by investing, and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.” – Warren Buffett
“If you don’t fully understand the risks of an investment you are contemplating, it’s OK to do nothing,” – Mark Cuban
“The four most expensive words in the English language are ‘this time it’s different.'” — Sir John Marks Templeton, dubbed “the greatest global stock picker of the century” in 1999.
If you’re interested in becoming a crowdfunding investor you must first make sure you are an educated investor. Equity crowdfunding investing is one of riskiest types of investments, even riskier than investing in cryptocurrency, The more you educate yourself he better your odds of making good startup investment picks. Your first lesson; crowdfunding investments are not ordinarily bought and sold on an open market like stock in Tesla or Apple or Chevron or Costco. You need to understand financial statements and fundamentals and the track record of the management team. Your favorite bookstore or local library would be a great place to start. Watching lots of daytime CNBC will be a graet help. Listen to everything Jim Cramer says. Read every letter to Berkshire-Hathaway shareholders and the Wall Street Journal; and Barron’s every day.
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