Equity Crowdfunding
January 31, 2022 | By Kevin Vela
Equity crowdfunding allows startups to raise capital in exchange for equity from multiple investors (hundreds or even thousands) through online platforms. This is different from rewards-based crowdfunding (e.g., Kickstarter) that many often associate with “crowdfunding,” where one would receive a product or service in return for their investment; instead, with equity crowdfunding, an investor receives equity ownership in the business she invests in. As mentioned in some of our previous articles, crowdfunding platforms help to facilitate communication and the transaction between the company and multiple individual investors. Equity crowdfunding became possible in May 2016 when the 2012 JOBS Act’s Regulation CF came into effect. You can read more about the details of Regulation CF here. Below is a brief summary of why crowdfunding may be of interest to investors and startups, as well as a list of some popular crowdfunding platforms.
Investors
For anyone who is interested in venture investing but only wants to/can invest small amounts, equity crowdfunding can be a great option. Companies will have varying minimum investment amounts, but many crowdfunding campaigns allow investments as small as $100, allowing you to spread out your investment among multiple companies.
Similar in format to the rewards-based crowdfunding sites, like Kickstarter, equity crowdfunding platforms feature private companies pitching their ideas and why you should invest in them, often organizing them by industry. The entire transaction is conducted through the crowdfunding platform.
Startups Raising Capital
Equity crowdfunding can be a great option for startups trying to raise capital. As opposed to applying for a loan or seeking out accredited investors via traditional channels for raising capital, taking in capital via a crowdfunding campaign may be an easier route. Not only do you have access to more potential investors (the general public), but setting up your company’s campaign on an established crowdfunding platform can also double as marketing and media exposure and recruit early advocates to the company.
Here are equity crowdfunding platforms that we like:
Republic
Republic has been online since late 2016 and has since raised over $500M invested by 1M+ people.
SeedInvest
SeedInvest was founded in 2012 and has successfully funded over 250 companies, with an average of $975k raised per funded company.
StartEngine
StartEngine has been offering equity crowdfunding since mid-2015, and just like the businesses it helps fund, uses equity crowdfunding to support its own growth, having over 20k shareholders.
WeFunder
One of the first platforms in the equity crowdfunding market, WeFunder has grown to have an investment annual run rate of $310M+.
Fundable
Fundable has helped companies raise over $568M in committed funds and has several resources to help both investors and startups understand and navigate the crowdfunding landscape.
*As with most private equity investments, equity crowdfunding typically requires long-term commitments from investors (liquidity being a big reason why many choose to invest in publicly traded stocks) and may be accompanied by a 12-month lockup period after closing in which you must hold onto the equity before attempting to sell it.
About the Author(s)
Kevin Vela
Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.
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