Over the past decade, crowdfunding has become a major force for business, creative ventures, nonprofits—and now investing. Equity crowdfunding is a relatively new investment category that became widely legal in the United States back in 2016 and received a huge boost due to new regulations this year. No matter your small business type, you should be aware of this new funding option—and you might find new investment opportunities that pique your interest.
If you’ve been on the internet in recent years, you’re probably aware of crowdfunding: a way that individuals, businesses, groups, or causes raise money from people online. Maybe you’ve donated some money yourself through platforms like Kickstarter, Indiegogo, or GoFundMe, among many others. In many cases, donations are linked to rewards. Often a business will “sell” a product it’s planning to manufacture at a discount.
Equity crowdfunding is a different system—instead of seeking donations or drumming up presales, companies engaged in equity crowdfunding are looking for investors.
In a typical crowdfunding situation, the person contributing funding functions as either a donor or a customer. With equity crowdfunding, however, you’re actually an investor in the long-term success of a business.
Unless you’re wealthy or run a brokerage fund, there wasn’t really a way before equity crowdfunding for you to invest in a private company, i.e. one that isn’t selling shares on a stock market. Through equity crowdfunding, investors from the general public can now buy shares of private companies.
Equity crowdfunding gained steam at the turn of this century and became legal in many countries around the same time as other forms of crowdfunding, like Kickstarter, grew in popularity. In the US, it took until 2016 for equity crowdfunding to become fully legal, and it must be done through online platforms regulated by the Securities and Exchange Commission (SEC).
“In the United States, all regulated crowdfunding transactions must take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal,” according to a Library of Congress guide. “To invest, a potential investor must open an account with a crowdfunding intermediary…All written communications relating to that crowdfunding investment must be electronically delivered.”
Depending on your income, the SEC sets limits for how much you can invest through equity crowdfunding in total and for each company—and these limits can change over time.
In March 2021, the SEC expanded the possibilities of equity crowdfunding. Now, companies can raise up to $5 million across a 12-month span, up from a little over $1 million.
To invest in a company via equity crowdfunding, it needs to be listed on an SEC-approved crowdfunding site. Companies use these websites to pitch to potential investors among the public, and the platforms ensure all regulations are followed.
The list of equity crowdfunding platforms is expanding, but equity crowdfunding investors favor a few main players. AngelList, EquityNet, WeFunder, Startups.com, and CircleUp are all very popular platforms that each have been in the equity crowdfunding space for years.
As with other investments in your company, you don’t “pay back” equity crowdfunding as a business owner. Instead, you offer a return on investment (ROI).
“With rewards, donation, and debt-based crowdfunding, when you pledge funds, you do not own any part of that project or company,” European crowdfunding website Seedr explains. “With equity crowdfunding, when you pledge or invest, you become a beneficial shareholder of that company and can enjoy the benefits and risks associated with that.”
With equity crowdfunding, the investors have an interest in the overall success of your company—because if you succeed, they do too.
You can’t get rich from equity crowdfunding as a business owner because your investors will expect a return if your business turns a profit—and if all your funding goes into your salary, that becomes a massive red flag for the SEC and the IRS. In other forms of crowdfunding, you’re raising money for a specific need; enriching yourself is generally a tough sell. In equity crowdfunding, people are investing in your business, not your personal bank account.