Considering crowdfunding to raise money to grow your business? Choosing which type of crowdfunding to pursue is an important strategic decision.
You’re probably familiar with rewards-based crowdfunding platforms like Kickstarter and Indiegogo, where companies ask for money in exchange for some “perk” – whether it’s a simple shoutout on social media or a sample of the actual product the business is selling.
But equity crowdfunding – selling actual shares in your company to the crowd – is changing the game, and challenging the traditional perspective on what it means to invest in a business. And as of May 16, it’s legal in the US to sell shares of your company to just about anyone under Title III of the JOBS Act.
Both have their perks and drawbacks (and there’s also debt crowdfunding, which I’ll talk about in a future post).
Wondering which option is best for you? Check out the pros and cons of rewards crowdfunding and equity crowdfunding in the infographic below.
You’ll notice that “rules & regulations” are both a pro and a con to equity crowdfunding. A regulated market isn’t necessarily a bad thing, if the regulations support the growth of small businesses making a positive impact while helping both entrepreneurs and investors protect their investments. But the highly regulated environment of equity crowdfunding – and the fact that it’s still so new in North America – also means that start-ups have to navigate some pretty complex rules. Victoria Silchenko, Ph.D. and founder of Metropole Capital Group, notes that “you have you have to follow rules and regulations and become very fluent, get comfortable with a certain level of disclosure and have a business model that allows you to face incurring costs.” In other words, be in tip top shape, legally and financially.
Rewards-based crowdfunding works well to raise money from people who will not have a say in what happens to the business, nor would they necessarily have the skills to run it; but the logistics of rewards distribution could be a pain, says Sonia Agnesod of LittleBigMoney.org, a crowdfunding platform for Latin American companies.
Perhaps equity crowdfunding’s biggest drawback is simply that it is so new and non-accredited investors are still mostly naive about how it works or how to invest. As that changes, and regulations evolve, we could see some incredibly exciting deals that set a precedent for what’s possible in the world of investing – and even change the investment world altogether.
Interested in learning more about equity crowdfunding? Download a free ultimate guide here or ask your questions in the comments below.