Is equity crowdfunding a good idea or a bad idea?
Is it going to be a massive explosion in wealth creation or is it gonna be a huge disaster?
If you’re not familiar, go read my other article that explains what equity crowdfunding is and how you can use it.
In this article, I want to address whether or not equity crowdfunding is good for investors and businesses. There are strong arguments on both sides, but we’ll get to a definitive answer for you.
Because, let’s be honest, there are clear negatives of equity crowdfunding. There are also times when it’s proven to be extremely effective. As with most things in life, nothing is black and white. There are always going to be shades of gray.
I had to consider this topic a lot when writing my recent book, Equity Crowdfunding Explained. As an educator and coach, I think it’s my responsibility to give you a clear idea of what to expect before participating in this industry.
Why It’s Gotten So Much Attention
The reason why this topic has received so much news coverage recently is because previously, the laws in the United States did not allow ordinary Americans to invest in startup companies.
Don’t get me wrong, under a Reg D 506(b) offering, you are allowed up to 35 non-accredited investors – think family and friends – but they must be thoroughly educated. Also, under 506(c), which allows general solicitation, the participation of non-accredited investors is prohibited.
In 2015 – 2016, this all started to change as startups started to advantage of Reg A+ of the Jobs act to give non-accredited investors access to startup offerings. Eventually, Title III or regulation crowdfunding offerings soon followed, which allow the participation of every-day Americans.
For the first time in history, you can market your startup’s funding round to every day Americans (called general solicitation). You can raise upwards of $1 million under Reg CF and up to $50 million under Reg A+.
Equity crowdfunding is getting a lot of attention because:
- New set of rules now in effect
- More startups seeing success and making the news
- Service providers assembling to help entrepreneurs
By the way, this isn’t only happening in America. We’re also seeing other equity crowdfunding platforms usher in a new era of innovation with websites like CrowdCube and Seeders in the UK. There are so many benefits to be had…
Benefits of Equity Crowdfunding
There are benefits both on the investor and the business-owner side when it comes to this new financial tool. Many in the industry have been calling this a new way to democratize startup funding.
Let’s first discuss some of the benefits for investors, or those people who have funds that they want to put into the next great startup. These investors can now access investors that were previously private and reserved for the ultra-wealthy.
The benefits for investors include:
- Unprecedented access to investments previously reserved for the ultra-wealthy
- High growth startups = bigger potential ROI
- Less investment screening (platform helps with it)
- Visually attractive easy-to-watch pitches
- Cap on personal portfolio exposure as mandated by SEC
- Ability to influence the value of their investment by sharing their favorite startups with friends
- Potential to claim exclusive rewards and perks
Typically, investing is a pretty dry business. You’re looking through accounting, statistical charts, and boring business documents.
With an equity crowdfunding campaign, you can quickly get a sense of the company by watching their engaging pitch video and the entire page is designed to appeal to beginners, not sophisticated investors.
The benefits for startups include:
- Instant access to capital in as little as 30 – 60 days.
- Media attention and ability to network with influencers
- Early adopter investor community to grow user-base
- Access to a network of investors for future funding rounds
- Easy-to-use dashboard to manage investor communications
- Social proof, which can be used to attract larger VCs and Angels
When running a public crowdfunding campaign, the world is watching. This is an amazing opportunity to make a splash and drum up interest in your startup, ecommerce business, or new mobile app.
It goes without saying that you’ll get the funding that you need to grow your company, but you’ll also establish a powerful relationship with a network of investors that can spread the word about your company or even participate in future funding rounds.
Despite all these great benefits, there certainly are some drawbacks…
Drawbacks of Equity Crowdfunding
I gotta admit, there are some clear drawbacks when it comes to this new funding arena. These are things that both investors and entrepreneurs should be aware of before taking the plunge and participating in one of these offerings.
Let’s get into some of the cons for investors. These are items that you want to have on your radar before jumping head first into the startup waters. Some of these mistakes could end up costing you a lot of money.
The drawbacks for investors include:
- Startups fail at high rates, making it risky
- Potential for future dilution in later funding rounds
- No direct control over management of company
- Lack of secondary market liquidity
- Limited and potential skewed marketplace information
I talked a lot about this in my book, Equity Crowdfunding Explained. As an investor, one of the advantages that you have is your own job or career. You can use this as an information advantage because you know a lot about a marketplace (and which ideas might work well)
However, this can also be a huge disadvantage. If you don’t know much about a particular industry and you’re relying on the campaign page for the information about that sector, then naturally it’s going to be skewed.
Not knowing what you’re doing is a fatal mistake. The less information that you have about the marketplace and the inner-workings of the company, the more risky it is.
I would recommend going through some of the guidelines that I outline in the book before getting started.
The drawbacks for startups include:
- Cap on the amount you can raise
- Onerous regulations you must abide by
- Legal and accounting costs for a raise
- Need to market and promote the offering
- Public campaign risks public failure
- Investor management needed
One of the biggest drawbacks is the cap on the amount of money you can raise under Regulation Crowdfunding and the legal and accounting costs that are attached to a Regulation A+ raise.
From a fundamental level, this limits the number of entrepreneurs that can use equity crowdfunding. You must have some resources in order to pull off one of these financial raises. You can learn more about the platforms here.
Now that you know a bit about how equity crowdfunding works, the benefits, the drawbacks, and some of the red flags you might want to watch out for, now let’s discuss how you can get involved.
How to Get Involved (if You Want To)
The next step is to educate yourself a bit before investing in or running one of these offerings.
I know that I wrote this book (so I’m a bit biased) but seriously, you’re gonna want to read this. It’s the best source of information out there when it comes to equity crowdfunding.
You’ll quickly discover all of the top platforms, service providers, and resources in this niche. You’ll also get access to the strategy that ANYONE can use to supercharge their campaign. This will set your startup on FIRE. You’ll be growing faster than you ever imagined.
I wanted to write this book for you because I sensed that there wasn’t enough good info out there the industry. Anything that I came across was super dense and technical.
I wanted to cut through all of that confusing jargon and create a guide that anyone could easily read. You can then apply these finding to your own investing portfolio or to your startup company.
