What is equity crowdfunding and why is it good news for investors? In this article, we’ll show you some of the benefits of getting on the equity crowdfunding train.
The immediacy and openness of the internet has massively changed how we transact and this is evident in every sector including the investment world. You’ve probably heard of funding platforms like Kickstarter and Indiegogo which allow business founders to raise capital for their products by “pre-selling” them. Usually, they offer discounts or perks on these products as incentives for becoming an early adopter. Equity crowdfunding is based on a similar underlying idea, but with a major difference. While both models involve turning to the “crowd” for investment (rather than to a bank, VC, or private investor) there is a big difference in the nature of the relationship, as you’ll see in this article.
If you’ve only recently heard about equity crowdfunding, this isn’t because you’re out of touch – it’s a fairly recent development. In the past, talented founders with promising business ideas had limited options for seeking investment; they could get a bank loan, go to family, or get funding from a VC. This all changed in 2015-2016 when two changes to Jobs Act regulations made equity crowdfunding possible and opened a door for businesses to seek “smaller” investments from a much wider audience. For the entrepreneur, the advantages of this new model are obvious, but what about for investors? We’ll take a look at some of those benefits here:
In Kickstarter-style campaigns, once the investor has received their product and “perk”, their relationship with the company ends. Equity crowdfunding, by contrast, offers investors the opportunity to enter into a mutually-beneficial, long- term relationship. By acquiring securities (in the form of equity in the company, revenue share, debt, convertible note, or other), investors are placing an educated bet on the success of the company in the hopes of receiving a significant return on that investment in the long term. This makes crowdfunded equity investors more invested in the long term wellbeing of the company, and in some cases, investors even get the opportunity to play a role in shaping a company’s future.
Access to Private Companies
When most people think of investing, they think of purchasing shares on a stock exchange. Historically, this was the only way to invest, and most individual investors could only buy shares in public companies – namely, those that had been through an IPO and were publically traded on national exchanges. But, the complexity and financial burden involved in the IPO process has meant that companies are trying to bypass this step and their numbers are declining steeply. In the current climate, especially in Israel – where entrepreneurship is flourishing and startups are all around – the IPO model doesn’t work as well. Going through the IPO process is too time-consuming, costly, and complicated for most startups. The opportunity to gain ready-cash from private investors is more appealing for the majority of startups and also benefits the investors who gain an opportunity to get in early on promising private companies they could never have had access to before.
Smaller Minimum Investment Amount
In the traditional model, buying equity in a startup was a privilege reserved only got a select few, amongst which were VCs, and angel investors. Equity crowdfunding has effectively “democratized” the process of investing in private companies, giving many more people access to opportunities. While most crowdfunding platforms still set a minimum limit for investment, generally the amounts are not as large as in the past.
In traditional private equity investments, the funds invested are subject to a “lock-up” period in which the money cannot be taken out of the investment (via a trade or sale, for example). This requirement prevented the less wealthy from participating in this type of investment because the risk of being so illiquid was too great, as compared to higher net-worth individuals with the financial freedom to have large sums of money tied up and illiquid for an extended period of time. Equity crowdfunding is changing this landscape because the concept enables investors to purchase shares that can be traded in public markets. This, combined with the fact that equity crowdfunding regulations also allow for a higher number of shareholders per deal, means that there is a large potential market and greater liquidity. Should an investor decide to pull out of an investment after a year, they are likely to easily find a buyer for their shares.