Equity crowdfunding provides companies looking for finance with a way to connect with vast numbers of potential investors, some of whom may also be customers.
What is equity crowdfunding?
The use of equity crowdfunding by companies looking to raise equity finance is becoming increasingly common.
It consists of raising money directly from a large number of people all putting in relatively small amounts. It is a means to connect companies with potentially hundreds of thousands of potential investors, some of whom may also be current or future customers.
It does this by matching companies with would-be angels via an online platform.
Raising equity finance through crowdfunding platforms can be an alternative to seeking angel or venture capital finance through more traditional routes for start-up, early-stage and growth companies.
With equity crowdfunding, people invest in an opportunity in exchange for a small stake in the business. This is different from debt crowdfunding, where people lend the business money, and expect to be repaid. Equity crowdfunding is more risky for investors and they will expect a potentially higher return.
Is equity crowdfunding right for my business?
Crowdfunding may be an option if you are a start-up or small business with a compelling proposition and strong business plan.
You need to be prepared to spend time ensuring your offer to be promoted on a crowdfunding website is compelling and engaging.
Preparing for equity crowdfunding
Before putting a pitch for equity investment on a crowdfunding platform, you would need to show that your business is investment-ready.
As with attracting traditional angel or venture capital investment, you need to produce a business plan and financial forecasts. A business might also include a video summarising the opportunity.
The fees payable for raising equity finance on the crowdfunding platform will typically be a success fee and legal fees related to the issue. You may incur additional legal and advisory fees in the preparation of the pitch.
Limited due diligence is usually carried out by the platform and the investor may have the option to ask for more information. Although the investment will be listed on the platform, investors will not be advised to invest in a particular equity offering.
Equity crowdfunding is regulated by the Financial Conduct Authority (FCA).
Some crowdfunding platforms offer equity and debt finance options.
Finance at every stage
Business financing is not a one-off decision, but an ongoing and evolving situation. No decision can be made in isolation to the businesses journey. Find out more about what options are suitable now and what might work at another stage.