Understanding Equity Crowdfunding

Raising capital to launch a new business can be challenging, especially for a first-time entrepreneur. Done properly, equity crowdfunding can give new business ventures the working capital required for a successful launch. A skilled business attorney from Von Rock Law can help you ensure that you execute each step of an equity crowdfunding plan properly. Contact us today at (866) 720-0195 to learn more.

How Equity Crowdfunding Works

The Securities and Exchange Commission (SEC) explains that equity crowdfunding blends elements of crowd fundraising with the traditional investment of purchasing stock interest in a company. Donors receive interest in the company in return for their donations and equity ownership in the new venture. Online crowdfunding platforms permit entrepreneurs to create a business profile, including:

  • A detailed pitch to potential investors
  • Financial statements
  • Business plan and budget
  • Proposed company officers or board of directors
  • Marketing plan and competitive analysis

Most crowdfunding platforms assess fees for services that include a monthly listing charge, processing fees, or other services.

The History of Crowdfunding

Equity-based crowdfunding raises capital for start-up businesses and those seeking expansion. This method of capital recruitment is intended to provide financial return for investors. In the United States, the SEC regulates crowdfunding platforms, providing some protection for both business owners and potential investors.

Many of these regulations date back to 2012, when the United States Congress passed the Jumpstart Our Business Startups (JOBS) Act. This act was largely responsible for opening the door to equity crowdfunding in the United States. Initially, only accredited investors were permitted to participate in the equity crowdfunding industry; in June 2015, Congress passed an update under Title IV, Regulation A+ of the JOBS Act, permitting non-accredited investors–ordinary people desiring a share in a proposed business–to participate in equity crowdfunding. As the SEC explains, a final part of the JOBS Act, Title III, Regulation Crowdfunding, limits the amount that early-state startups may raise from both accredited and unaccredited investors to $1 million in a 12-month period.

Equity Crowdfunding: Key Things To Know

According to the American Bar Association, equity crowdfunding is considered securities-based fundraising. The business owner issues securities, or ownership shares, to the investors in exchange for capital.

Unlike a traditional public IPO launch, crowdfunding investment sums vary considerably, with an average of a few thousand dollars. Other forms of crowdfunding, those that are not considered equity-based, offer different rewards in exchange for investment. Investors participating in those types of crowdfunding may be the first to receive an exclusively new product; at times they simply donate because they believe in the entity.

Benefits and Drawbacks of Equity Crowdfunding for Investors

Investors may have more flexibility when investing in crowdfunded businesses than in some other business types. Startup business owners attempting to raise capital via crowdfunding may permit smaller investments than are typical on a stock exchange, which appeals to many investors with limited means who hope to reap a substantial return on a small investment. For some savvy investors, the company could become a “unicorn” and produce significant returns over the years.

Low Risk

Although start-ups can still be risky, with the risk shared among so many investors, individual investors often do not stand to lose a significant amount. Although some degree of risk comes with any business investment, cautious investors can further manage their risk level by only funding businesses that publish a solid, detailed business plan and marketing analysis.

Low Threshold

Crowdfunding provides easier access to capital by comparison to traditional bank loans, as there is no loan application process. The threshold for approval to list a business on a crowdfunding platform is much lower than the threshold for getting approved for a small business loan from a bank.

Minimal Dilution

There is less pressure on company management, as crowdfunding does not carry some of the obligations that venture capital funding does. There is rarely a dilution of power within the enterprise. Because there are so many shareholders, it is unusual for one or two parties to control a large voting bloc of the shares.

Investor Input

This does not mean the investors have no say in the business operations. In some cases, if the business owner wishes to sell, the investors may wish to have a say in the transaction, especially if they haven’t reached a point of breaking even on their investment.

Considerations for Startup Businesses

Equity crowdfunding differs from traditional small-business capital fundraising in that there is no debt incurred. Instead of taking out small business loans, entrepreneurs sell ownership shares to raise operating and start-up funds.

Like other forms of business inviting participation in exchange for investment, however, entrepreneurial startups also must comply with federal and state securities filing regulations. These can be complex; the business attorneys at Von Rock Law can help you understand your legal filing obligations and draft and file the appropriate documents for you.

Can You Make Money From Equity Crowdfunding?

In many cases, yes. The amount of capital a business owner is able to raise often depends on the strength of their proposals, though, just like any type of capital-raising venture. Business owners have stiff competition for investment, too; investors can browse a crowdfunding platform in its entirety and compare ventures.

A strong business plan, with each step of launching the business and marketing its goods or services clearly delineated, helps an enterprise to stand out from the competition. Hard numbers and research to back up the sales. Profit projections, especially in the first year, also make an enterprise look like a more viable investment.

Is Equity Crowdfunding a Good Idea For My Business Venture?

Ultimately, the decision to raise launch or working capital for a business through crowdfunding is up to you. If you do not have a lot of experience with the financial and legal aspects of owning a business, then seeking legal assistance can help you avoid many of the common crowdfunding problems that plague new businesses.

Starting Your First Equity Crowdfunding

Entrepreneurs have a wide range of options for online crowdfunding. Many of the most popular platforms set a framework for users, including a safe money transfer system and multiple payment options for both investors and business owners. These platforms often also offer marketing and support services for users.

Choosing a Crowdfunding Platform

Look for platforms that are SEC-registered. The registration and SEC oversight provide greater protection, although there are some stipulations that donors and entrepreneurs must comply with.

Fundraising Caps and Restrictions

Contributions are limited for investors, and companies themselves may only raise up to $50 million within a 12-month period. The fundraising cap for companies depends on the fundraising tier it selects. A further restriction is not financial, but geographic – online platforms registered with the SEC must be based in either the United States or Canada.

A San Francisco Business Attorney Can Help With Your Equity Crowdfunding Process

If you are considering using equity crowdfunding to launch a new business venture or raise capital to expand your existing enterprise, a skilled San Francisco business attorney from Von Rock Law can help. Contact us today at (866) 720-0195 to schedule a consultation.

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