Equity Crowdfunding 101

WeStock Team
March 16, 2023

Many of you reading this week's blog post might be familiar with the term Equity Crowdfunding. Maybe you have just recently learned of it, have previously raised capital this way or this might be your first time hearing about it. Well, this form of crowdfunding is relatively new, having only been available since June 2015. There is a lot to learn and you are not alone if you have no idea what we are talking about. Whatever level of expertise you might have on this topic, we are here to share reasons why this new way of investing can benefit your brand.

So What Is Equity Crowdfunding?

Equity crowdfunding is raising capital from individuals through the sale of securities (shares, convertible notes, debt, revenue share, and more) in a private company (that is not listed on stock exchanges).

You might be more familiar with traditional crowdfunding. The key difference between crowdfunding and equity crowdfunding is what is being sold. Crowdfunding sites can be successful for both companies and investors, but the relationship is short-lived. With traditional crowdfunding, entrepreneurs raise money by accepting donations in return for some sort of perk, such as a free or discounted product that is acquired after the money has been gifted. Websites like Kickstarter and Indiegogo raise money through the presale of the specific brand's products. Once the investor who participated in that campaign receives their perk, the contract between the company and the investor is done. Both parties got what they wanted, and move on to the next new thing.

With equity crowdfunding, the company raises capital by selling securities, such as equity in the company, revenue share, and more. By investing in your company, they have part ownership and earn a share of profits as long as they hold the security. This type of funding allows for a larger group of investors to be involved. There are two types of equity crowdfunding:

  • accredited crowdfunding allows companies to raise funds from high-net worth individuals and institutions.
  • Open-access regulated crowdfunding invites anyone to invest in a company in exchange for a slice of the financial pie, or the right to money or future crypto-assets (you may get perks too).

The difference comes down to who is investing. Equity crowdfunding came into place just a few years ago, allowing everyday people to invest in startups they believe in.  In the past, only accredited investors could invest in private companies. This was to protect everyday citizens from investing money they couldn't afford to lose, but now that regulations and protections are in place, equity crowdfunding is an investment option available to everyone.

Equity crowdfunding allows individuals to make small investments in companies who they believe will grow, hoping that their return will be larger than the original sum invested. This is great for brands because it allows you to collect funds from a wider group of people, rather than just your friends and family who believe in you. One benefit for both the investor and company is that it’s easier access to capital because you can promote your business to a wider audience. There’s also less pressure on management because there are more investors involved, so there is less of a need to appease a small group of high-value shareholders. Not to mention if your company becomes profitable, more individuals benefit in the form of returns. But of course, none of this happens overnight.

Luckily there are several platforms that have been designed specifically for brands to make the funding process relatively easy. There are different requirements for both the brands and the investors to consider, but for the most part, if you are over the age of 18 and you meet the financial requirements, you can start your investment process.

So what exactly does equity crowdfunding offer? With equity crowdfunding, companies are selling “securities”, whether in the form of equity in the company, revenue share, or more. Investors in equity crowdfunding don’t participate just to get in on an exclusive deal or discount like crowdfunding. In this kind of funding, the investors stand to make a profit in the end. As the company grows, so does their initial investment,and what investor doesn’t like the sound of more money coming into their pockets in the end if everything works out?

There are many platforms that are meant specifically for brands to post what they are looking to raise. This eliminates all the searching, setting up meetings, and anxiously awaiting to hear if they are interested in investing with you and your company. These three platforms are popular when it comes to equity crowdfunding. They also offer additional support that is helpful to first-time brands.

  1. WeFunder
  2. Republic
  3. Startengine

Because equity crowdfunding platforms give you greater access to investors, you have a larger group of people supporting your brand and betting on your success. They are incentivised to to tell others about your brand,  to share your crowdfunding campaign, and purchase your products to ensure your growth. They may network to get others to invest in your company as well by creating a buzz behind your name. Experienced investors looking for brands like yours might even be willing to offer guidance along the way, if they have had previous success with brands similar to yours.

Raising capital  and growing a fan following is great, but there are regulatory requirements entrepreneurs have to follow. It’s important that you research along the way. The two most important regulations you should become familiar with are:

  1. Regulation Crowdfunding
  2. Regulation A+

To understand each one in full detail click here.

Overall, equity crowdfunding is a chance for your company to make connections with investors of all kinds. Besides looking to make a profit from your success, your investors become part of your brand's community, creating a support system that will celebrate your wins and will want others to be a part of helping you reach your goals. Fundraising can be a stressful process, but because of new opportunities like equity crowdfunding, the process can be a bit less intimidating. There is still so much more to learn about equity crowdfunding, so if you are interested in learning more please feel free to watch this video that further explains this investing process. If you're a brand that has successfully funded this way, feel free to share your story with us and we’ll give you a shout-out!

Reference: https://corporatefinanceinstitute.com/resources/knowledge/finance/equity-crowdfunding/

WeStock Team

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