Equity Crowdfunding Demystified – Part II

With equity crowdfunding, you raise funds from private investors by offering unlisted shares in your company. This model is different from offering investors shares of a company listed in the stock exchange. You need to register with the SEC to participate in such equity-based fundraising. Offering shares in your business to would-be investors isn’t the only crowdfunding solution. There are ways to reward investors through crowdfunding platforms without giving up portions of your business.

Debt Crowdfunding

Debt crowdfunding is a hybrid solution between traditional crowdfunding and small business loans. With this business financing type, the loan is from a crowd instead of online lenders or financial institutions after signing a loan agreement. You repay the money borrowed with interest, over a number of months, as per agreement. No shares of your business are required for funding.

Donor Crowdfunding

Donor crowdfunding or donation-based crowdfunding, is a process involving people who contribute to a cause without expecting any returns. Friends and family members donate funds to support the dream of opening a new business. Non-profit organizations and charities prefer this crowdfunding mode to solicit donations from supporters to the cause. Some online platforms available for donation-based crowdfunding campaigns, are GoFundMe, CrowdRise and Fundly.

Rewards Crowdfunding

Crowdfunding which is rewards-based is a fundraising option appealing to entrepreneurs who avoid debt that needs to be repaid. Here contributions are taken from financial backers in lieu of benefits as a trade-off. The rewards offered to contributors can be as simple or complex like copies of books before publishing or a massage therapist rewards donations with gift certificates for future services. A trial and error process helps to find suitable rewards to motivate people to share and support your compelling vision. Some entrepreneurs offer an array of various rewards which could be of value to the donor for the amount the supporter or well-wisher contributes. This is a trial and error process!

Equity Crowdfunding Sites

As the SEC regulates and looks over equity crowdfunding, you have to utilize an SEC-mandated funding platform to solicit funds from the public in lieu of your company’s equity. Despite regulatory hurdles, a number of equity crowdfunding platforms are available. You review several sites to assess options that ensure the best fit. Some great equity crowd-funding sites are: CircleUp, Republic, WeFunder, Fundable, StartEngine, Netcapital, MicroVentures, Mainvest and SeedInvest

Pros and Cons of Equity Crowdfunding

Equity crowdfunding is a business funding solution if unable to access funds due to revenue limitations, credit issues, or lender requirements issues. Without debt to repay and interacting with numerous investors, you could raise more money. Business owners structure crowdfunding campaigns to retain more business equity and offer small portions to investors. You attract non-traditional investors to support business goals, gain visibility and build support before launching the business. You share a portion of the company’s future profits for cash injection now. As per SEC guidelines, you disclose the company’s financial details to every potential investor, online. The risk of public failure exists if your equity crowdfunding campaign bombs. Equity crowdfunding platforms charge fees and retain 5-15% as commission. Traditional investors refrain as it’s tough to resell shares of small companies without being financially hit. Crowdfunding campaigns are time-consuming, without any guarantee of securing funds to make the energy and time spent, worthwhile.