Equity crowdfunding is enabled by online platforms that help early stage and fast-growing businesses raise capital from a whole range of different investors. Lets take a look at how this typically works from both the fundraiser’s and funder’s perspective. Imagine that you are part of a business which is looking to raise money to grow and deliver on your ambitions, so you decide to use equity crowdfunding.
As a fundraiser in this instance, you would naturally look at different platforms before choosing one which would enable you to access the type of funders needed to build your vision. You would upload all the company information that funders need to make an informed decision. This might include a business plan, your financials and legal and shareholder information. You may also choose to provide a video at this stage to help attract investment.
Let’s look at a couple of considerations your company will have prior to launching. Firstly, your business needs to decide how much money you want to raise and how much equity you will give in return. Perhaps most importantly, you will also have to explain how you plan to get funders a return on their investment to compensate them for the risks they are taking.
Equity crowdfunding is a very risky business, and many fundraisers can be expected to go bankrupt and cease trading. It is vitally important these risks are communicated clearly and openly. After you have answered these questions, the platform will then conduct checks on your company to verify all claims. Once all this has been signed off, the fundraiser is ready to launch publicly.
Let’s look at how your business might progress in promoting the investment opportunity. The initial launch might focus on promoting the investment to known networks via social media, emails, or in the press. As a firm, you will need to respond to lots of questions on the platform forums and provide updates to build and maintain interest amongst potential funders.
If your fundraiser successfully reaches its target, the process of issuing new shares certificates and drawing down the investments from the funders can begin. Once all the legal paperwork is complete, your business can secure the investment– minus the platform fee, of course. From then on, you will keep the new investors up to speed on how the business is developing and hopefully deliver a return on the investment in the future.
Let’s take a look at this process from the perspective of those providing capital, the funders. A funder might be an everyday retail investor without much investment experience. They may be a very wealthy, high-net-worth individual. They may be experienced professional investors, or they may even be institutions which invest in startups or growing businesses, such as venture capital funds or professional angel networks.
A funder will find a business which they are interested in, and to access more information, wil register with the platform. From here, they will accept the Ts and C’s, go through a know your customer check, and may even go through a screening process to make sure they understand the risks, such as loss of capital and share dilution.
The funder will then be able to do deeper research into the fundraiser via the platform to look in to financial, legal, and business documentation. They might also be able to ask the team questions to help in their decision-making about whether or not to invest. Once the funder has decided to invest, they can choose the amount of money in return for a given amount of equity in the fundraising company. They will then make a payment that will be held in escrow.
At this stage, to help promote the investment, funders might be encouraged to share their support via social media with their network. If the fundraiser reaches its target, the funder’s money will be drawn down and processed. If the fundraiser does not reach their target, the money will be returned to the funder. However, once the target is reached, a share calculation will take place, and the funder’s money will be processed.