What Is Equity Crowdfunding? How It Works, Where to Get It

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 type of equity financing that involves 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, while some charge additional payment processing fees. You might also need to pay for services, such as accounting, to get the paperwork in order. 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.

Pros and cons 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

• 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

• 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.

Alternatives to equity crowdfunding

If you decide that equity crowdfunding isn’t for you, there are other options to fund your small business.

• Venture capital. Venture capital (VC) is a type of business funding usually invested in rapid-growth businesses. VC firms can fund startups or operating businesses in exchange for a percentage of ownership in the business. 

• Angel investors. Individual investors, usually high-net-worth individuals, who give money to startup businesses in exchange for ownership are known as angel investors. 

• Small-business loans. Small-business loans are a type of debt financing that includes term loans or lines of credit, and are issued by banks, online lenders, nonprofit lenders or fintech companies. Depending on the type of lender and loan, small-business loans are among the least expensive ways to fund your business. 

• Small-business grants. Small-business grants are a free way to fund your business. They are either issued as a lump sum that doesn’t have to be repaid, or they are reimbursed after you have fronted the expenses. Corporations, federal and local government or other private resources all award small-business grants. 

How to get started with equity crowdfunding

Here are a few crowdfunding platforms that offer equity crowdfunding: