Crowdfunding vs IPO – Differences & Similarities
Like any good showdown, crowdfunding vs IPO is a tale of the tape, so to speak. Investing money somewhere is the most lucrative way of growing wealth, as saving money does not increase its worth; instead, it deteriorates with time. Finding a good investment channel and using it correctly can help you multiply your wealth.
IPO and equity crowdfunding are two popular ways of investing in businesses. However, IPOs have experienced a sharp decline in recent years while equity crowdfunding has gained popularity.
In this article, we will explore the crowdfunding vs IPO question and discuss the current state of both markets with their future.
Differences Between IPO and Equity Crowdfunding
Definition
IPOs, or Initial Public Offerings, allow companies to raise capital by going public and selling their shares to the public for the first time.
Equity crowdfunding allows individual investors to invest in private companies in exchange for equity ownership, which benefits investors and companies by giving them a flexible way of building wealth.
Process
IPO is famous for its complex and stringent process with involvement from many regulatory bodies like SEC (Securities and Exchange Commission).
The crowdfunding process is not as complex and stringent as the IPO process. Companies must provide detailed information about their financials, management team, and growth strategy to attract investors.
Companies and investors can go for crowdfunding through various avenues, including online equity crowdfunding platforms. With any investment opportunity, companies must do their due diligence and consult a financial advisor before pursuing crowdfunding.
Regulations
One of the key differences between IPOs and equity crowdfunding is the level of regulatory oversight. IPOs are heavily regulated by bodies like the SEC, which can be a deterrent for some companies. On the other hand, equity crowdfunding is famous for being less regulated and more flexible, attracting more companies looking to raise capital without the restrictions of a regulated market. That’s a double-edged sword since companies can play free and loose with the rules to the detriment of investors. Score a pint for IPOs in the equity crowdfunding vs IPO debate.
Amount of capital
Another difference between IPOs and equity crowdfunding is the capital companies can raise with them. IPOs are usually used by larger companies that want to raise significant amounts of capital in less time. On the other hand, Equity crowdfunding is often used by smaller companies that want to raise smaller amounts of capital from a wider range of investors.
Level of involvement
Another key difference between IPOs and equity crowdfunding is the level of involvement and control investors have over the company. Investors typically have limited control over the company’s operations and decision-making processes in an IPO. In contrast, equity crowdfunding allows investors to be more active in the company’s management and decision-making processes.
Current market state
According to CNBC, IPOs went from boom to bust in 2022, with the tech IPO market collapsing. The number of IPOs decreased by 38% in 2022, and the average IPO return was negative at 6.5%. Many factors contributed to this decline, including a weaker economic outlook, rising interest rates, and increased regulatory scrutiny.
One of the reasons for the decline in IPOs is the increased scrutiny from regulatory bodies like the SEC. The SEC requires companies to meet strict financial and reporting requirements, which can be time-consuming and costly. Additionally, the SEC has been cracking down on fraudulent behavior in the IPO market, which has led to increased scrutiny and regulations.
The crowdfunding equity market has experienced significant growth in recent years, fueled by a combination of regulatory changes and increased investor interest in early-stage companies. The crowdfunding equity market grew from $2.1 billion in 2015 to $16.2 billion in 2020, representing a compound annual growth rate of over 50%.
However, like many other markets, the crowdfunding equity market was not immune to the impact of the COVID-19 pandemic. In the early months of the pandemic, many investors became more risk-averse and focused on preserving capital rather than investing in early-stage companies. This resulted in a slowdown in the crowdfunding equity market, with some platforms reporting a decline in investment activity.
Despite the pandemic-related challenges, the equity crowdfunding market has rebounded strongly recently. According to data from Crowdfund Capital Advisors, the crowdfunding equity market grew by 92% in the first half of 2021, with over $5 billion raised across all platforms. This growth can be attributed to several factors, including the increased availability of capital, the growing popularity of alternative investments, and the rise of special purpose acquisition companies (SPACs) as an exit strategy for early-stage companies.
In addition to these factors, the equity crowdfunding market has also benefited from regulatory changes that have made it easier for companies to raise capital through crowdfunding. In March 2021, the SEC raised the annual fundraising limit for Regulation Crowdfunding from $1.07 million to $5 million, making it easier for companies to raise larger amounts of capital through crowdfunding.
Future of Equity Crowdfunding vs IPO Comparisons
The decline in IPOs is not expected to turn around any time soon, with The Street reporting that tech IPOs are not likely to return to the market anytime soon. Forbes’ IPO market forecast for 2023 is also not promising, with experts predicting a slow recovery from the current slump. Point scored for crowdfunding in the crowdfunding vs IPO showdown. Startup investors will have hundreds of possibilities in crowdfunding with slim pickings in the IPO world,
The future of equity crowdfunding is bright, as the market is expected to continue to grow and evolve in the coming years. Forbes estimates that by 2025, the equity crowdfunding market will grow with a CAGR of 15% resulting in 200 Billion. With regulatory changes, increasing investor interest, the growth of the startup ecosystem, and advancements in technology driving growth, equity crowdfunding is poised to become an increasingly important source of capital for early-stage companies and an attractive investment option for investors seeking higher returns.
Equity Crowdfunding and Broader Investment Trends
The core of crowdfunding vs IPO is the same: raising capital by offering company shares to investors, with some key differences that set them apart. The involvement of investors, the size of the investment, and regulations set them apart from one another. hen it comes to investor involvement, investor sentiment is the deciding factor.
This is where a very wide divergence has occurred from 2022-2023. IPOs and SPACs were virtually non-existent in all of 2022 and the first half of 2023 when this article was published. On the other hand, new equity crowdfunding offerings steadily increased. In that round of equity crowdfunding vs IPOs, crowdfunding clearly won. But is this wise?
Despite these differences, equity crowdfunding trends closely mirror broader investing trends and investor sentiment because crowdfunding equity investors are typically individuals looking to invest in early-stage companies with high growth potential. As such, broader investment trends and market sentiment are more likely to influence them.
One trend influencing equity crowdfunding in recent years is the rise of social media and online networking. Many equity crowdfunding platforms use social media to connect companies with potential investors, making it easier for investors to find and invest in companies that align with their values and investment goals. Additionally, the rise of online networking has increased the number of accredited investors who can participate in equity crowdfunding.
Another trend influencing equity crowdfunding is the growing interest in sustainable and socially responsible investing also known as ESG. As a result, many investors are looking for companies committed to environmental and social sustainability and are more likely to invest in companies that align with their values.
Finally, the growing popularity of equity crowdfunding can be attributed to the increasing demand for alternative investment opportunities. Many investors seek ways to diversify their portfolios and reduce their exposure to traditional investments like stocks and bonds. Equity crowdfunding allows investors to invest in early-stage companies with high growth potential, offering the potential for significant returns.
Crowdfunding vs IPO Conclusion
In conclusion, IPOs and equity crowdfunding have advantages and disadvantages, and the choice between them depends on individual investment strategies and risk tolerance. IPOs offer a way for companies to raise significant amounts of capital quickly, but they come with significant regulatory and financial requirements. Equity crowdfunding, on the other hand, offers a more flexible and accessible way for companies to raise capital.
While IPOs have experienced a significant decline in recent years, equity crowdfunding has gained popularity as a way for companies to raise capital from a wider range of investors. Moreover, equity crowdfunding trends closely mirror broader investing trends and investor sentiment, making it an attractive option for companies and investors alike.
