Building a successful startup is difficult. Without access to seed capital, it's even more difficult. However, if you have a great business plan and are able to get your brand going, crowdfunding stocks might be the perfect option for your business.
New laws are opening up this crowdfunding option, making it a more viable method of raising capital for thousands of businesses.
An overview of equity crowdfunding
Equity crowdfunding allows members of the public to invest in a privately owned company. An entrepreneur or company, usually a startup, uses a stock crowdfunding platform to offer securities in exchange for an investment from members of the public.
Most often this security will be in the form of stocks, and as the company grows and thrives, the value of those stocks increases, providing the investor with a return on their investment.
Why is this important for companies?
If you've ever started a business, you know it's not easy to do. One of the biggest challenges is raising funds to get your business off the ground. In the past, if you wanted to raise funds from members of the public, you had to find a venture capitalist or angel investor (people with a net worth of at least $ 1 million or an annual income of at least $ 200,000).
However, the introduction of the JOBS Act in 2012 gave private companies the opportunity to raise capital through regular members of the public.
On the other hand, crowdfunding stocks allows regular investors to step into the ground floor of a business opportunity. Even the largest companies in the world like Google and Amazon started their lives as startups. With stocks crowdfunding, ordinary people have an opportunity to invest right at the start of a future journey from Google.
However, for any Google or Amazon, there are endless examples of failed startups. In fact, the default rate for startups in 2019 was 90 percent, so investing through equity crowdfunding is a risk.
Equity crowdfunding trends
Many of the trends in crowdfunding stocks stem from the need for consumer protection. When you invest in publicly traded companies, you are investing in an established, highly regulated company, but that is not necessarily the case with equity crowdfunding.
However, it takes tremendous resources to become a public company, making it inaccessible to startups and small businesses. Instead, they are turning to alternative methods of raising capital such as crowdfunding stocks. While this offers great opportunities for regular investors, it can also expose them to high risk.
For this reason, investing in startups has traditionally been reserved for venture capitalists and angel investors as they had the resources and experience to manage that risk. However, cutting out the regular investor from these options also created a two-tier system in which savvy investors could not get into entrepreneurial startups.
JOBS Act 2012
Protecting investors, while important, has meant that regular investors missed out on promising opportunities and startups found it difficult to raise the capital needed to get their businesses off the ground.
That changed with the Jumpstart Our Business Startups (JOBS) Act, which enacted laws to open up the stock crowdfunding market.
Regulation remained strict, especially when compared to some other countries, but what was crucial was that companies could now turn to the “crowd” for funding. With regulation crowdfunding, which allows businesses to raise up to $ 1.07 million annually, and Regulation A, which can fund up to $ 50 million annually, there was a viable opportunity for businesses to: Raise capital.
JOBS Act Update 2020
In 2020, the Securities and Exchange Commission made some adjustments to the JOBS Act and increased the number of corporations that could crowdfund each year. Under the new regulations, companies could raise up to $ 5 million annually through Regulation Crowdfunding and up to $ 75 million annually through Regulation A.
With the average startup round being $ 2.2 million in 2020, crowdfunding stocks has been a much more viable option for startups to secure the funds they need to run their business.
A growing market
Equity crowdfunding is a relatively new market, and while it's worth over $ 10 billion, that's a tiny drop in the ocean compared to the $ 282 billion raised by venture capital in just one year.
However, crowdfunding of stocks is growing rapidly, and if you look at the markets in other countries, there are indications that this fundraising option could grow exponentially in the years to come.
In the UK, equity crowdfunding is much more established. This is mainly due to more favorable legislation that has allowed crowdfunding companies to grow much faster. However, with the JOBS Act updated, the U.S. startup market is likely to see a similar surge.
How to get equity crowdfunding for your startup
As you'd expect with a growing market like crowdfunding stocks, there are numerous platforms to choose from. Each one has its unique selling points. Hence, it is important that you do your research and find the platform that represents the best deal for your business.
Once you've decided on a platform, you need to apply. This is a very important step. These platforms are extremely invested in protecting their investors, so they will thoroughly examine your application. You need to present your company in a strong light and offer a business plan that will provide value to the platform's many investors.
If you are accepted on a platform, you can set your terms (what kind of security you want to sell, how much you want to increase, etc.). This is one of the great advantages of stock crowdfunding because you are in control of your terms.
You are not negotiating with a single angel investor who can potentially negotiate you. Instead, you make your offer available to the crowd, and it is up to each individual whether or not to accept it.
The final step is to take care of compliance by making sure you have all legal documents and pass the financial tests. Regulation crowdfunding (up to $ 5 million) requires an independent financial audit, and Regulation A + crowdfunding (up to $ 75 million) requires a full financial audit, which takes a little longer.
If your business turns out to be in good shape, you can raise around $ 50,000 – $ 75,000 in donations in about six months, according to StartEngine, in four to six weeks at very little cost, or through Regulation A crowdfunding in about six months.
Successful equity crowdfunding case studies
Equity crowdfunding may be relatively new to the financial world, but many companies have had great success with it.
When we think of startups, our thoughts are generally drawn to technology, but one of the best examples of stock crowdfunding comes from the world of beer.
BrewDog started in 2007 as two men with a taste for beer and has grown into a $ 2 billion company. Stock crowdfunding has a lot to do with it. The privately held company is 22 percent owned by a collection of 120,000 investors who have invested approximately $ 95 million through 2020.
In a world dominated by a handful of great brewers, this has allowed BrewDog to expand well beyond the reach of the average craft brewery, and they continue to use stock crowdfunding to invest in their green credentials.
Gambling company Paradox Interactive raised $ 3 million in the first 8 minutes of its offering. This shows the power of crowdfunding and the ability for companies to raise capital quickly.
Later that year, Paradox Interactive went public and was listed on NASDAQ for $ 420 million. This shows that crowdfunding stocks is more than just a fundraising tool, it's an opportunity to get your business going.
When someone invests in you they become a trademark attorney, and when you have thousands of these people around the world, it can catapult your brand into public awareness.
Knightscope, a security technology company, is a perfect example of the flexibility that crowdfunding offers for stocks. Knightscope initially raised $ 150,000 in just seven days and used that to scale. He returned to the table 6 months later to raise $ 1.1 million.
This was nothing compared to the $ 20 million they would raise just two years later.
CEO William Santana Li made explicit reference to the impact crowdfunding stocks could have on strengthening the Knightscope brand. Together with the raised capital, the company was able to grow, reach an estimated value of over $ 320 million and lead to speculation about an IPO of the company.
This is another example of how good stock crowdfunding can provide a great platform for a start-up to do much bigger things.
Stock crowdfunding companies
The US equity crowdfunding market is largely dominated by three companies: WeFunder, StartEngine, and Republic.
The top 10 platforms raised $ 209 million in 2020, of which over $ 177 million was raised by these three companies.
WeFunder played a huge role in lobbying the government against the JOBS Act and has been a leader in crowdfunding stocks from its inception. It has the largest market share in terms of capital raised and can add great exposure to your business.
One of the most appealing aspects of the WeFunder deals is the ability to sign up with no fees until you have successfully raised funds.
This means you can dip your toe into the world of crowdfunding and focus on marketing your business as an investment opportunity before worrying about the payoff.
Start the engine
StartEngine has a community of over 300,000 investors. This means that it is a great platform for getting your startup noticed.
With over 375 successful raises and totaling over $ 250 million for its clients, StartEngine is one of the first places to be when it comes to crowdfunding stocks.
StartEngine prides itself on helping you every step of the way with a full service plan that puts you in complete control of your offering. It focuses on keeping power in the hands of the entrepreneur and allowing him to tailor his offering to suit his business needs.
Republic is focused on its platform's ability to do more than raise capital for your business. With over 350,000 investors, the company advertises its ability to “gain real fans and supporters” worldwide.
This is certainly an underrated part of stock crowdfunding, and it's important to remember that it's about more than just money. The notoriety a successful crowdfunding campaign can bring you is a great marketing source in itself, and Republic is quick to highlight it.
Crowdfunding, VC Capital or Angel Investments: which one is right for your company?
At first glance, crowdfunding sounds great, but as with anything, it has its downsides. When considering how to invest in your startup, you need to look at the positives and negatives and focus on how they fit into your business plan.
Benefits of equity crowdfunding
- Create thousands of trademark attorneys around the world.
- Get public endorsement from a successful crowdfund.
- Increase brand awareness.
- Stay in control of your business (you don't give investors a say in running the business).
Disadvantages of equity crowdfunding
- You need to be at the right stage in your business development.
- You need to create a buzz around your brand.
- Pre-aligned investments are often required to get people interested in your offer.
- This can be time consuming.
If you compare crowdfunding to venture capital or angel investing, it is clear where crowdfunding triumphs: control.
When you have thousands of small investors instead of a handful of large investors, the external pressure and potential influence of your investors is much less.
Thousands of small investors aren't telling you how to run your business, but they do go into their communities and spread the word about your business, which can have a huge impact.
Building a thriving startup isn't easy, but when you don't have access to capital, it's a lot harder. In the past, private companies had limited opportunities to raise funds. Due to changes in the law, equity crowdfunding gives startups access to thousands of investors looking for the next big thing.
Not only is this an opportunity to raise a large amount of capital, but it can also boost your marketing by creating a huge buzz for your brand.
As you raise millions of dollars from investors worldwide, people will talk about your business and become brand advocates, which is almost as valuable as the money you raise.
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