Equity crowdfunding is changing the game for start-ups that need financing, whether the goal is to raise $200,000 or $1.5 million. Equity crowdfunding is very different from contributor-based crowdfunding, which you’re probably familiar with from platforms like Indiegogo and Kickstarter. Those campaigns are basically a gift to the business, usually in exchange for a product or service that gets created with the money that’s raised.
The difference here is that the people who fund your startup actually get shares in your company.
And when people are buying a piece of your company, you better believe they want to see your plan for success.
In this guide I’m going to explain what equity crowdfunding is, how to access it (in Canada and the USA, at least), and most importantly how to get your business ready for it — including putting together your business plan, which is essential to the process.
So if you’re checking out options for business financing right now and equity crowdfunding is on your list of places to look — read on. You won’t find a better free guide out there.
First let’s go over the basic definition of equity crowdfunding and how it’s different from other types of financing.
What Is Equity Crowdfunding?
At its most basic definition, equity crowdfunding is a type of business financing that allows you to invite members of the public to buy private shares in your business. However, it implies that anyone can be eligible to invest — and that’s not necessarily true. Until recently, only accredited investors could purchase an equity stake in a start-up — and it’s not easy to become accredited. You have to have a high net worth and income; put simply, you need a fair bit of wealth to be allowed to make these types of investments, because they carry a lot of risk. So, start-ups that wanted to engage in equity crowdfunding still had a pretty small pool of potential investors to reach out to.
Until now. There is a new exception to the rule about who can invest in a start-up. Securities regulators like the Securities and Exchange Commission (SEC) and certain Canadian Securities Regulators now allow companies to access certain exemptions to securities laws to give them more flexibility in how they raise money for their companies. One of those exemptions allows non-accredited investors — that’s you, me, your neighbor, your skiing buddy — to put a little cash into a small business that needs it, in exchange for a few equity shares. The new exemptions allow just about anyone to buy shares in a company they love and want to support, as long as the start-up has a strong business plan and has applied for funding through one of several online portals that administrate the fundraising campaigns. Equity crowdfunding now “enables your existing network to participate” in the growth of your company (Sean Burke, CFO, Frontfundr.com).
This guide won’t go into the details of the exact legislation — but the resources at the end of this guide will take you to the National Crowdfunding Associations in the US and Canada where you can read up on the legalese.
The opportunity in equity crowdfunding is massive, and you are at the forefront of it.
If you’ve never heard of equity crowdfunding, you’re not alone. But it is a significant and quickly growing way to raise money for companies that might not otherwise have access to funding. Here’s a breakdown of the global state of crowdfunding from TheCrowdfundingCentre.com:
Right now, investors can’t trade or sell these shares the way they can on the stock market. But some are talking about a future marketplace for this activity, which could make the equity crowdfunding arena really interesting.
One of the most fascinating features of the equity crowdfunding marketplace is that it changes the fundraising game by making it about more than simply Return on Investment (ROI). According to Barry James, Co-Founder and CEO of TheCrowdfundingCentre.com, there’s a balance being struck between generating returns and serving a purpose — one that non-accredited investors in particular can get behind. In its infancy, equity crowdfunding isn’t totally about the money. Sometimes, an investor just really wants to see a start-up succeed. That endorsement is massively powerful.
However, it doesn’t take away from the need for a strong business plan, a clear legal structure and a credible, sustainable business model. There’s real money involved, and real risk.
Is this only for tech companies?
There’s a perception that equity financing is only for technology companies, but with equity crowdfunding, that’s not true at all.
Not at all! Look what Brewdog did. This craft beer maker in the UK raised £25 million through equity crowdfunding in 2015. Basically, “any small business that needs capital and can use it efficiently can go into this market” (Irwin Stein). If you have a brand and a product that regular consumers can get behind, quickly understand and easily explain to others, then equity crowdfunding is worth looking at when you’re thinking of raising money for your business.
Equity crowdfunding allows your start-up’s raving fans to be both emotionally and financially connected to your company. That’s a powerful brand endorsement that can create incredible momentum for your company. But there are drawbacks, too. You have to give up some equity and that might be costly for your business down the road — more costly than debt, depending on the circumstances.
Wondering if your start-up is a good fit for equity crowdfunding? Let’s get into the details.