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Pitching your business to venture capitalists may not be in the cards for first-time entrepreneurs or small shops, but crowdfunding can help you find both accredited investors and everyday people willing to back your company.
What is equity crowdfunding and how does it work?
Equity crowdfunding is a method of raising capital online from investors in order to fund a private business. In return for cash, investors receive equity ownership in the business. Equity crowdfunding happens on online platforms where businesses create profiles that include their pitches, financial statements and other information.
Crowdfunding platforms may charge a percentage of funds raised for their services; many charge a monthly listing fee; some charge additional payment processing fees. You might also need to pay for services, such as accounting, to get the paperwork in order.
How is equity crowdfunding different?
Equity crowdfunding is not the same as rewards-based crowdfunding, which gives backers rewards (often products or services) in return for donations.
Equity crowdfunding is also unlike other types of small-business funding in that it has no debt component. Rather than making payments toward a business loan, you sell shares of ownership in your company to investors.
Is equity crowdfunding legal?
Yes. The U.S. Securities and Exchange Commission allows private companies to legally raise up to $5 million in a 12-month period through equity crowdfunding. You can raise funds in increments. Investors can be accredited (meaning they meet asset, income, employment or other requirements) or everyday consumers, including family, friends and business partners who are bullish on your company’s success.
What are the benefits of equity crowdfunding?
Selling shares of your company is an alternative to a business loan. Equity crowdfunding can also be an option for businesses with strong growth potential. But as with any type of funding, it has its pros and cons:
Pros of equity crowdfunding
Selling shares to multiple investors may raise more cash.
Equity platforms may pool the funds into a single investment, streamlining the accounting and financial reporting.
No loan repayments or debt-related credit checks required.
Potential buzz about your business and connections to potential customers.
Cons of equity crowdfunding
Selling part of your business could be problematic if investors want a say in your operations.
You’ll need to spend time creating a persuasive presentation that includes marketing plans, financial projections and even a video that communicates the value of your idea.
You have to comply with state and federal security filing rules. You also have a fiduciary duty to tell shareholders about the health of the company.
How to get started with equity crowdfunding
Here are a few crowdfunding platforms that offer equity crowdfunding: