Equity Crowdfunding Demystified – Part I
As a small business owner, securing funds for your start-up is challenging. Less than 1% of start-ups secure funds from angel investors while venture capital benefits .05% of start-ups, as per experts.
But you could leverage business equity shares in exchange for capital through equity crowdfunding strategy. Equity crowdfunding isn’t the only strategy for every entrepreneur, but if interested in debt-free financing of your business, it is a good fit for you.
Equity Crowdfunding and how it works
Equity crowdfunding uniquely raises capital for your business without adding to debt. This fundraising attempts attracting investors willing to fund your business goals in lieu of a financial stake in the company. Equity crowdfunding has evolved into a business funding model that collects smaller sums of money from numerous private investors who may invest as little as $100. This approach does not seek to attract major investments from venture capital firms or angel investors. This business capital strategy is inaccessible for many start-ups and established small businesses. Equity crowdfunding is called regulation crowdfunding as its regulated by the Federal government.
Even if not selling shares on the stock exchange, your business offers equity to investors in exchange for capital. This process entails more rules than encountered with a simple online fundraising campaign on GoFundMe or Kickstarter. If using equity crowdfunding platforms to raise capital for your business, following rules is critical or you could face unpleasant consequences. Failure to follow rules may force refund of investments received. The U.S. Securities and Exchange Commission (SEC) may freeze business’ ability to offer shares to investors for limited periods. Some steps are needed before selling business shares through online crowdfunding platforms:
- Work through SEC-registered broker-dealers/ funding portals to process all investment transactions
- Accept up to $5 million per year in crowdfunding investments
- Follow federal limitations on fin-caps from individuals/ non-accredited investors in 12-month period
- Make financial disclosures public, based on the funding your business raises
- Beyond legal norms, design a campaign to energize followers to invest in your business
- Equity crowdfunding campaigns communicate key details to potential investors, about amounts needed, how funds are utilized, customers targeted, probable profit margins, how the business is differentiated from competitors, and why investors should back you.
Alternatives to Equity Crowdfunding
Equity crowdfunding raises capital for some entrepreneurs but is unsuitable for some businesses, it could be one component of the total funding puzzle, as alternatives to equity crowdfunding, or supplementing the funding you raise is among various options worth considering.
Small Business Loans are a traditional way to generate capital needed to start/ grow business. Various affordable options for small business loans are possible in USA, as Small Business Administration (SBA) loans to online business loans, are available for entrepreneurs and others who do not qualify for traditional financing.
Business Credit Cards offer flexible ways of borrowing money for your start-up or existing business. With good personal credit scores, many business credit card options are easier to qualify for, even if your business is new.
If you have a promising start-up business, you could attract funding from angel investors or venture capital firms. While working with accredited investors may not work for all new business ventures, if your success may secure adequate funds to boost your start-up to the next level.
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