#1 Equity Crowdfunding Information, News, Reviews and Guides for Startups
Equity crowdfunding differs from other forms of crowdfunding. In regular crowdfunding, then backers receive a product or simply support a project. In equity crowdfunding backers are investors and receive shares of the company. Equity crowdfunding platforms help entrepreneurs raise money to fund their business and investors an opportunity to find promising startups. Equity crowdfunding platforms create a marketplace between founders and funders.
Top 3 Highest Rated Equity Crowdfunding Platforms
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- AngelList (angel.co)
AngelList is one of the most popular equity crowdfunding platforms. For a company seeking investment, then AngelList provides a big opportunity because the investor base on the platform is very experienced. In fact, some professional investors only invest through AngelList. One reason investors like AngelList is simplification. AngelList can handle administrative tasks related to the fundraising process (such as contractual agreements and capital collection) so entrepreneurs can receive their capital more efficiently. For investors and entrepreneurs, AngelList is a great platform.
- EarlyShares (earlyshares.com)
EarlyShares promotes private market investing as part of a diversified portfolio. As part of the process, then EarlyShares vets all potential companies that appear on the platform. As a result, EarlyShares reports only about 5% of applicants are accepted to the platform, which benefits investors. EarlyShares also concentrates on providing commercial real estate and investment funds to investors. For inexperienced investors, EarlyShares is a good platform to reduce risk and gain experience.
- CircleUp (com)
CircleUp differs from general equity crowdfunding platforms because they focus on consumer products and retail companies. Based on the type of company looking to raise capital, CircleUp may not be a good fit. Many companies fundraising are technology driven, so CircleUp provides a platform for non-tech firms to raise capital. For investors with experience in consumer products and retail, then this is probably the preferred platform. For entrepreneurs starting a consumer products or retail company, then this is a good platform to fundraise.
Equity Crowdfunding Overview
In order to get started investing through equity crowdfunding platforms, then there are a few things to note. First, investors should determine their risk threshold. Investing in companies through equity crowdfunding platforms means the companies are private. There is no public stock market to sell your shares if you no longer want to hold the investment. This means investors should take a long term view because it will take years for the investment to provide any tangible returns. If an investor gets nervous with traditional the stock market volatility, then they should think twice about investing in equity crowdfunding platforms.
Additionally, private companies have a high failure rate. Equity crowdfunding platforms typically provide an opportunity for startups to seek funding. All new businesses are risky, but startups are unique because they strive for huge growth. When successful, then startups produce huge returns on invested capital. The flip side is most startups fail. According to some studies, about 75% of startups fail to return investors capital. Investors should have a diversified portfolio and not invest in only one private market company.
Finally, investors should view these companies as active investments. Due to the high failure rate, investors should support companies that they believe in. Private companies need help with various aspects of their business and rely on investors to help. To increase the odds of success, then any investor that backs a company should support them to their fullest capacity.
Equity Crowdfunding Vs Other Equity Investing Options
There are many ways of obtaining capital to start or grow a business. Equity crowdfunding platforms seek to match investors with companies to raise capital for business owners. This is part of equity investing. (There are other forms of raising money by taking on debt through banks or credit cards, which will not be addressed). The investors are financiers, which means this is their profession. They are experts in analyzing a business (the vetting process) and determining its potential to grow and become a big company. Investors like to provide money at early stages, then help the company grow. This is risky because most companies fail, so the businesses that are successful become worth a lot of money. The process to start and grow a company into a successful business takes many years and lots of ups and downs.
Venture capital (“VC”) is one major way to provide capital for ownership. A VC investment is made through an organization, which means VCs are businesses too. Venture capitalists raise money from third parties like wealthy individuals and organizations. Then, the VCs invest that money in promising new businesses and share the profits with their investors. Once a VC makes an investment, then they may become an advisor or board member to the company. Venture capitalists and entrepreneurs view their relationships like marriage. The relationships are crucial because businesses take time to develop and VCs provide lots of money to help the growth.
Angel investors also invest capital to fund new businesses. There are a few differences between angel investors and VCs. One main difference is how the investments are structured. VCs invest other people’s money and angel investors provide their own money. Typically, angel investors do not have a formal role with the company. However, angel investors still view the relationship with entrepreneurs like a marriage as well.
The Securities and Exchange Commission (“SEC”) is the government agency that oversees financial investments. In 2012, the SEC passed the Jumpstarting Our Business Startups Act (the “JOBS Act”). The JOBS Act allowed accredited investors to invest in startups.
Equity crowdfunding is still new. The SEC approved the section of the JOBS Act that allowed any accredited investor to fund startups in September 2013.
Due to the risky nature of starting a business, then there are some rules and regulations around who can invest. The SEC regulations limit who is an accredited investor based on income and net worth. Accredited investors must earn at least $200,000 per year or $300,000 as a joint income with a spouse. If the income level is not met, then accredited investors can pass a net worth test. Accredited investors have a net worth more that $1 million (excluding their primary residence). The SEC mandates investors pass one of the two tests to qualify as an accredited investor.