Most often, kick starting your project or small business necessitates getting extra help from people. CrowdFunding becomes an option. Today, we’ll just quickly look at what exactly is equity crowdfunding before diving into how you can actually raise funds online through crowdfunding.
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Some think of it as a means for people to collectively perform a task that can not be done by one person.
With Equity Crowdfunding the investors become a shareholder in the company (issuer). An investor owns shares in a company that may provide the investor with benefits such as the right to vote at shareholder meetings, entitlement to dividends out of the company’s profits (if declared), and the investors get to share in the value in the company when shares are sold. Of course, you also run the risk that any investor faces with owning shares of a company, in that the company may fail or its value significantly declines.
Equity Crowdfunding offers investors and companies (issuers) incredible new options to investing in and funding new business ventures. Till now there has been no precedent for non-professional investors to invest in innovative ideas and potentially receive great returns.
The Equity CrowdFunding Eco-System
The first important understanding is that Equity Crowdfunding works in a highly regulated environment determined by the country or state/province involved.
Securities Commissions are charged by the local government to implement laws providing detailed regulations, monitor and provide oversight and intervene when necessary with fines, penalties and sanctions. In short, to keep things on the straight and narrow – to regulate who can invest and how a qualified company (issuer) can participate. The primary goal is to protect investors and ensure a straight forward market place.
A great example is the Jobs Act Title II & Title III in the United States. It provides a clear path who can invest, how to invest, how an equity crowdfunding portal needs to operate and how the issuer can access capital.
There are two types of investors that can invest in equity crowdfunding:
Accredited investors are those investors deemed by the securities commissions to be high net worth individuals who would not be catastrophically impacted financially if an investment in a company seeking funds through Equity Crowdfunding fails. Each country has its own parameters but roughly the top 3-5% of a country’s population would qualify. Typically, issuers and the Portal must confirm qualification with the local securities rules.
Non-Accredited investors are the “rest-of-us”, the rest of the country’s population that do not meet the requirements to be registered as an accredited investor.
Equity Crowdfunding portals bring companies and investors together in a secure cloud computing platform. There are portals providing investment opportunities for accredited investors and non-accredited investors. Equity Portals will also vary on size of offerings and vertical industry sectors.
Issuers (i.e. the company) exchanges shares (securities) for investors’ money via a selected Equity Crowdfunding portal. Currently in most North American jurisdictions only accredited investors can invest in Equity Crowdfunding (with some exceptions).
In a nutshell, Equity Crowdfunding is a new method of seeking financing that allows companies of all sizes (including startups) to raise funds through secured online platforms, giving them access to large numbers of qualified investors.
Equity Crowdfunding gives companies (issuers) an attractive option for raising funds, and provides investors with the possibility of a return on their investment.
What are the Risks and Rewards?
Like any investment made today there are Risks and Rewards for all parties involved:
Investor Risk: Many companies (issuers) raising funds via Equity Crowdfunding are typically small private companies and will likely require additional capital as they mature. If such additional capital cannot be raised in the future this could negatively impact the going concern of a company. If the companies are not successful in achieving their goals, the companies could fail or downsize, significantly depreciating the value of the initial investment made by the investors.
Investor Rewards: If the companies (issuers) are successful in achieving their business plan, they could pay investors dividends, or seek a public listing, or be acquired.
Issuer (Company) Risk: Using Equity Crowdfunding to raise capital exposes your company to your competitors, customers and could put your company at risk from losing control of intellectual property assets and market secrets. This risk is especially compounded if the information is sent via email or other non-secure means to the equity portal (see Appendix C for the benefits of Board Suite’s secure information sharing).
Issuer (Company) Rewards: Equity Crowdfunding gives companies an often more attractive and realistic option for attracting investment.
Officers/Directors Risk: It is important that Directors and Officers review all the materials they will be sharing with investors with legal counsel to understand liabilities associated with the disclosures and the dissemination of the information. Directors should know the securities regulators rules of the jurisdictions they are in, and where they will be Equity Crowdfunding in, before they apply at any Equity Crowdfunding portal.
The rules in foreign jurisdictions are not going to be the same as the country you are from, so it is important to speak with advisors (i.e. legal, accounting, and directors & officers insurance provider) that are knowledgeable about that jurisdiction.
Like any risk management situation, risks can be mitigated by understanding them and applying the right measures to protect the company, its officers and directors.
Officers/Directors Rewards: For officers/directors the access to capital in most cases far outweighs the issue of risk, so long as they have good advice on how to mitigate these risks.
By investing in a company through Equity Crowdfunding, the investors can derive the following benefits:
- An equity holding in the funded company.
- A return on investment, if/when the company is listed on a stock exchange, is sold or pays a dividend.
- A chance to fund the next big thing (i.e. the next Google, Facebook, Twitter, etc.).
- A way to directly support someone who following their dream of starting up and building a business which will bring innovation and jobs to a community.
- The opportunity to support the development of the business by contributing expertise.
Who is involved in Equity CrowdFunding?
Issuer (the company)
Is the legal entity who is seeking capital.
Who are seeking an investment opportunity and expecting a return on their investment (ROI).
Once you have invested in a company, the relationship with the issuer changes from Investor to Shareholder. The company will be required to be transparent to its shareholders and provide whatever information as required by their jurisdiction.
Most issuers who will be Equity Crowdfunding will find themselves requiring the use of a corporate secretary to help them manage their minute book, shareholder communications and register.
They provide the rules, guidance, oversight, fines/penalties and sanctions to the issuers, investors, portals and any parties involved in Equity Crowdfunding who have breached the rules in their jurisdiction.
Equity Crowdfunding Portal (ECFP)’s
ECFP bring the investor and issuers together. The ECFP will be required to perform due diligence on the investor and all those involved with the issuer (the amount of due diligence depends on the jurisdictions and type of Equity Crowdfunding portal).
Depending on the jurisdiction the ECFP will also be required to provide reports to regulators.
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