What is Equity-Based Crowdfunding?
Equity crowdfunding is a form of crowdfunding where entrepreneurs offer equity in their ventures in exchange for their campaign supporter’s investment, providing the potential to combine some of the benefits of crowdfunding with a funding structure similar to traditional equity funding options.
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What is Equity-Based Crowdfunding?
Equity-based crowdfunding is one of the newest forms of crowdfunding. In equity crowdfunding, entrepreneurs offer equity in their ventures in exchange for their campaign supporter’s investment.
Equity Crowdfunding provides the potential to combine some of the benefits of crowdfunding with a funding structure similar to traditional equity funding options. For instance, equity-based crowdfunding allows companies to gain exposure, build brand awareness, and validate ideas. However, unlike reward-based crowdfunding, equity-based crowdfunding allows you to raise capital without having to spend the majority of the campaign pledges to deliver rewards.
Examples of equity crowdfunding platforms include CircleUp, Fundable, and Crowdfunder.
In the U.S., equity-based crowdfunding platforms permit investors to invest as little as $25 in a startup venture, allowing entrepreneurs to solicit small investments from a larger number of supporters.
In comparison with traditional equity funding options (such as angel investing and venture capital), equity crowdfunding may also be easier to obtain and can often be secured within a shorter time frame.
How Does Equity-Based Crowdfunding Work?
In equity-based crowdfunding, the owners of a business organize a campaign on an equity crowdfunding platform where they offer equity (shares) in their venture in exchange for investments from the crowd. They submit a term sheet, an executive summary of the business, and a pitch deck or video and ask the crowd to contribute to their campaign in exchange for equity in their venture.
Types of Equity Crowdfunding
There are three primary types of equity crowdfunding, determined by the SEC regulations under which the crowdfunding is raised.
Regulation D Equity Crowdfunding: Regulation D (or Reg D) crowdfunding allows companies to sell equity in their ventures to accredited investors through an online platform. Accredited investors are individuals who have a net worth of at least $1 million or have made at least $200,000 each of the past 3 years.There are no limits on the amount of capital that can be raised. Prior to the JOBS Act of 2012, this was the only type of equity-based crowdfunding available and was only accessible to accredited investors.
Regulation A+ Equity Crowdfunding: Regulation A+ (or Reg A+) crowdfunding allows companies to raise up to $20M to $50M of capital selling equity in their ventures to both accredited and unaccredited investors. Prior to launching a Reg A+ crowdfunding campaign, you must have the past two years of your financial statements audited and receive pre-clearance from the SEC.
Regulation CF Equity Crowdfunding: Regulation CF (or Regulation) crowdfunding allows companies to raise up to $1M from accredited and unaccredited investors through a crowdfunding platform or a broker-deal. Because of its ease, Regulation Crowdfunding has become the most popular form of crowdfunding. You will need to fill out a form with the SEC, and depending on how much you raise, you may have to submit the past two years of your audited financial statements to the SEC.
What Type of Companies Do Equity Crowdfunders Invest?
Equity crowdfunders typically invest in startup- and early-stage ventures. The majority of these opportunities are concentrated in:
- Food & Beverage
- Technology
- Media & Entertainment
- Blockchain
- Health & Beauty
- Green Tech
- Real Estate
- Space
- Transportation
Equity-Based Crowdfunding Platforms
There are a number of equity-based crowdfunding platforms. To help you narrow down the right equity-based crowdfunding platform for you, here is an overview of seven of the top equity-based platforms.
WeFunder
WeFunder is one of the most popular equity-based crowdfunding sites. With Reg D, Reg A+, and Reg CF offerings, WeFunder allows both accredited and unaccredited investors to participate in equity-based crowdfunding.
WeFunder is an all-or-nothing platform, meaning that if you do not reach your goal you will not receive any of the proceeds of your campaign and the investments will be returned to investors.
WeFunder allows companies to raise $20,000 to $5M, with investors able to invest in your company with as little as $100. To date, 500+ companies have raised a total of more than $210M through WeFunder.
Types
Reg D, Reg A+, Reg CF
Minimum Investment Size
$100
Deal Sizes
$20,000 - $50M
Fees
Platform Fee: 7.5%
StartEngine
StartEngine is another of the most popular equity-based crowdfunding sites, also offering Reg D, Reg A+, and Reg CF crowdfunding and allowing both accredited and unaccredited investors to participate in equity-based crowdfunding.
StartEngine requires campaigns to set a minimum and maximum funding goal. As long as you raise more than the minimum raise funding goal of $10,000, you are able to keep what you raise even if you do not meet your maximum funding goal.
StartEngine allows companies to raise $20,000 to $5M, with investors able to invest in your company with as little as $100. To date, 375+ companies have raised a total of more than $250M through StartEngine.
Types
Reg D, Reg A+, Reg CF
Minimum Investment Size
$100
Deal Sizes
$10,000 to $50M
Fees
$10K in Deferred Revenue (after raise) +
7% of the Raise +
2% in Equity
Republic
Republic helps startups gain crowdfunding, and advertises themselves to their investors as a place you can invest with as little as $10.
Types
Reg D, Reg A+, Reg CF
Minimum Investment Size
$10
Deal Sizes
$10,000 to $50M
Fees: 6% of the total funds raised, read more about Republic’s Equity Crowdfunding Fees on their website
Crowdfunder
Crowdfunder is another extremely large equity-based crowdfunding platform for early-stage startups and established businesses raising seed, Series-A, and Series-B rounds of funding.
Crowdfunder is a Reg D crowdfunding platform, meaning investors are required to be accredited investors- someone who has a net worth of at least $1 million or has made at least $200,000 each of the past 3 years.
Crowdfunder is a keep what you raise platform, meaning that even if you do not meet your goal you still keep what you raise. To date, more than $160M has been raised through Crowdfunder, with an average deal size of $1.8M.
You must be approved by Crowdfunder to run a campaign on the platform. To be considered, you must submit an executive summary, an investor pitch deck, and a term sheet. Crowdfunder will then determine whether you can launch a campaign on their platform.
If you are approved to host a campaign on Crowdfunder, you may then solicit accredited investors to invest as little as $1,000 each in your company.
Types
Reg D
Minimum Investment Size
$1,000
Deal Sizes
Up to $50M
Average- $1.8M
Fees
$299-$499/month
Other Notable Equity Based Crowdfunding Platforms
Pros and Cons of Equity-Based Crowdfunding
There are both pros and cons to equity-based crowdfunding.
What are the advantages?
- Allows you to raise capital to leverage toward the business.
- Allows your venture to gain exposure, build awareness, and validate your ideas.
- No costs associated with delivering rewards.
- Appropriate for B2B companies and those that may not have a place on other crowdfunding models.
So, what are the disadvantages?
- Give up ownership/equity in the company.
- May miss out on the expertise and networks received through other early stage investment vehicles such as angel investments and venture capital.
