Equity Crowdfunding – All You Need to Know
Equity crowdfunding is gaining popularity with SME’s and investors, but what exactly is it?
This four-part series will cover all you need to know about Equity Crowdfunding.
- This article is Part One – What is Equity Crowdfunding.
- Part Two – Whether Equity Crowdfunding is right for you as an investor.
- Part Three – Five ways to reduce your risk in Equity Crowdfunding.
- Part Four – Whether Equity Crowdfunding is right for your business.
To understand Equity Crowdfunding, it is necessary to first understand the concept of crowdfunding:
Crowdfunding is when the “crowd” (i.e. members of the public) raise funds for a venture by putting in small amounts of money.
Equity crowdfunding plays on this idea.
Equity crowdfunding is when the “crowd” (anyone) invests in businesses in exchange for some form of security (shares, debt, convertible note etc).
These businesses are usually small to medium in size, often in early stages of growth, and unlisted.
Therefore, equity crowdfunding enables someone to invest a small amount of money in a business and receive in return a proportionate piece of equity in that business. This “piece of equity” is usually in the form of shares. The investor consequently becomes a shareholder of the business. They may profit if the business does well or lose their investment if the business fails.
How does equity crowdfunding work?
The transactions between investors and entrepreneurs/business owners usually occur online via online forums and social media. In New Zealand, there exists 7 active licensed crowdfunding platforms. A business uses one of these platforms to make an offer. The platform will often require the business to display their minimum funding target, information on the company, its offering and financial projections. This information is available to potential investors so that they can vet different businesses themselves. These potential investors (the “crowd”) can then chose which businesses to invest in.