The pursuit of business financing is very frustrating, especially amidst this challenging year for global business. Banks, venture capitalists, and angel vendors who are willing to lend businesses money are hard to find. That’s why crowdfunding, a technique where businesses fund projects or ventures with small contributions from many people (instead of one or two investors) to launch new projects, is becoming so popular. Modern-day startups primarily have three different crowdfunding options – rewards, donations, or equity funds.
With reward or donation-based crowdfunding campaigns, businesses and project creators get to maintain complete ownership of their work, brand, and business. With equity crowdfunding, members of the public fund businesses or projects in exchange for equity in the companies. Each investor is eligible to own a stake in the business (proportional to their original investments). In the past couple of years, the equity crowdfunding industry has grown a lot.
The passing of the JOBS Act by the US Congress has made it easier for small-scale organizations to raise money from both accredited and non-accredited investors. In 2020, the SEC made the process of equity crowdfunding easier for private companies aiming to raise capital. The Commission voted in favor of amending certain important rules such as –
- Raising the maximum offering limit of businesses to $5 million from only $1.07 million.
- Giving more options for unaccredited investors to invest larger chunks of their income or net worth.
- Leading equity crowdfunding platforms are now allowed to provide traditional debt-based offerings to investors such as SAFEs (Simple Agreement for Future Equity) or common stock.
2021 is a promising year for both potential equity crowdfunding investors and private companies aiming to raise capital. The international crowdfunding market is anticipated to almost triple in size by 2025. Over $2.5 billion has already been raised in equity crowdfunding programs, and that number is only expected to increase this year. So, how can small businesses use equity crowdfunding to support their ideas while promising shares of the company to investors? Here’s the detailed guide.
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Equity Crowdfunding in 2021
This type of fundraising has always been around. But, until recently, companies could only accept funding from accredited investors. Now, any member of the public can participate in equity crowdfunding processes and buy shares as a non-accredited investor.
- Business owners can ask the public to fund their project in return for a proportionate percentage of equity in the business venture.
- Equity crowdfunding is part of the capital market; all funds raised in this campaign are subjected to financial regulations.
- Unlike reward or donation-based crowdfunding campaigns, the process of selling equity is extremely sophisticated. Businesses must carefully choose the platforms that moderate equity crowdfunding.
There are many registered equity crowdfunding platforms in the market that serve as intermediaries between crowdfunding issuers (businesses) and their investors. Businesses can raise financing in 2021 by signing up with these platforms. Depending on the campaign and how much funding is required, businesses can sign up with multiple platforms like this. However, navigating the equity crowdfunding market is very complicated.
Since securities and the platforms that offer securities to the public are subject to strict securities regulations, crowdfunding issuers are held highly accountable for any fraudulent attempts. While choosing equity crowdfunding platforms, businesses must make informed decisions regarding –
- The structure of their offer.
- How details about the business are shared with the public.
- The types of securities being sold to the potential investors.
- The equity percentage details.
It’s best to make such decisions with the aid of lawyers. Thankfully, the process of creating and launching campaigns on top equity crowdfunding platforms is fairly straightforward. Here are the main steps that private companies aiming to raise capital need to take –
- Sign up with one or multiple equity crowdfunding platforms.
- Complete the background checks on the platform by providing essential business information to target investors (credible business plans, financial statements, profit forecasts, etc.)
- Once registered on the platform, the organizations must prepare their crowdfunding pitches. The goal of this step is to generate public interest. It typically involves constant iterations to keep the masses interested.
- Determine the equity stake and the share prices (to be mentioned in the pitch). Set campaign goals and financing targets.
- Set up the final offer and start raising funds in return for legal shares in the business.
- Once businesses hit their targets, the funds start to get released after some vetting processes are carried out by the platform.
- Legal shares are released to the investors. Depending on the nature of the crowdfunding campaign, investors may also receive voting rights in the company. Many investors in equity crowdfunding projects typically become advocates for the businesses. So, if a project has ten investors, it also has ten people who will promote the business like it’s their own.
Costs of Starting an Equity Crowdfunding Campaign
Throughout these steps, businesses have to pay fees to their equity crowdfunding platform/s for handling the legal compliance-related responsibilities on their behalf. This fee structure varies on different platforms. Mounting an equity crowdfunding campaign also involves several other costs.
Equity crowdfunding platforms may charge percentages of the amount raised, separate transaction fees, or equity in the business.
- Legal fees.
- Fees for setting up “pitch-worthy” business plans.
- Marketing and advertising costs for the campaign.
These costs, however, come with various advantages –
- Any entrepreneur with a viable business plan can benefit from equity crowdfunding, as long as they are willing to raise money by giving up some percentage of ownership in their business.
- Small businesses can raise large amounts of money quickly.
- Networking becomes easier as the team of investors becomes dedicated brand advocates.
- Instead of approaching each investor individually, small businesses gain easy access to thousands of potential investors on equity crowdfunding platforms.
The Challenges of Equity Crowdfunding in 2021
The key to equity crowdfunding campaign success in 2021 is focusing on results and modifying the campaign in a time-efficient manner. Successful campaigns also exploit various marketing techniques to impact the behavior of potential investors. When businesses launch unprecedented products or services, they need to do their best to increase brand awareness. This is where companies that have proven Crowdfunding marketing strategies can help.
Growth Turbine is one such company that builds effective industry partnerships to helps entrepreneurs convert their crowdfunding objectives into reality. The company is the “one-stop-shop” for crowdfunding campaign management services, helping private companies that are aiming to raise capital by
- Creating actionable business plans that are likely to impress target investors.
- Strategic consulting services to create brands that people easily understand and trust.
- Social media marketing.
- Search-engine optimization, creation of landing pages, and A/B testing to continuously increase lead generation.
- Handling all PR and media responsibilities (Growth Turbine is a publishing affiliate of USA Today, CBS, NBC, FOX, etc.)
- Create and customize content strategies, producing search-optimized content.
Growth Turbine has worked on over a hundred equity crowdfunding campaigns and raised $22+ million for small businesses across the world. If an entrepreneur/company has an idea, product, or service that’s worth investing in, companies like Growth Turbine can help create well-defined roadmaps.
