As of last week (May 16, 2016), the landscape is changing again when it comes to finding funds for your startup, or funds to help you expand your business to the next level. Equity crowdfunding is now available to the masses, and that means you might have the chance to look for new sources of business funding — without the need to go to the bank or try to catch the eye of a venture capitalist.
What is Equity Crowdfunding?
When many of us think of crowdfunding, we think of the campaigns on Kickstarter, Indiegogo, and Go Fund Me. With these types of campaigns, backers receive a token gift of appreciation in exchange for a donation. With this type of crowdfunding, there is no ownership in the company for those who provide the funds. They understand that they are getting nothing beyond the thank-you gift and the satisfaction of knowing that they are helping a cause they believe in.
Equity crowdfunding is different. With this type of funding, you can raise money for your startup or business expansion and provide shares to investors in exchange for the cash you need. It’s a way of getting money from your friends and family (or even acquaintances), but without the P2P loans or other mechanisms.
Prior to May 16, only accredited investors were allowed to be involved in equity crowdfunding. Now, anyone, with any type of assets, can risk their money with equity crowdfunding. This opens up the pool of people you can tap as you work to fund your startup. Many of the equity crowdfunding platforms are similar to the crowdfunding you’ve seen in the past. Only this time, you’re offering ownership in your company.
Basics of Equity Crowdfunding
Before you get too crazy with thinking about the possibilities for your crowdfunding campaign, it’s important to understand some of the basics. Here’s what you need to know about equity crowdfunding before you use it to raise money for your startup:
- Limit of $1 million: You can only use an equity crowdfunding platform to raise $1 million in a 12-month period. This means that you will need to find other sources, or you will need to make sure you keep your costs low.
- Watch out for how many people fund your campaign: You need to be aware of how many unprofessional investors are funding your campaign, especially if you are an established small business looking for expansion. Once you have 500 unprofessional investors and your company has $25 million in assets, you are subject to the same regulations that govern public companies.
- Don’t pitch your company: Equity crowdfunding rules allow you to share information about the name of your business, and what type of business it is, as well as the platform you are using. However, you can’t use social media to pitch your network and follows on the investment. No details should be shared over social media.
- Be ready for paperwork: Even though equity crowdfunding makes it easier for people to invest in your company, you need to be ready for paperwork. Depending on how much you raise, you will need to file different types of paperwork. Some platforms provide support for these reports, but others don’t.
Do your research to see if equity crowdfuning makes sense for you. Once you have an idea of what to expect, you can start deciding how to manage your offering.