What Is Equity Crowdfunding?

Equity crowdfunding gives everyday people the opportunity to invest in private companies and gives businesses a new way to raise capital from the communities that believe in them.

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You may already be familiar with crowdfunding websites where people contribute money to help launch a product, support a creative project, or fund a cause.

Equity crowdfunding works differently.

Instead of receiving a T-shirt, early access, or another reward, you receive an investment in the company. Depending on the offering, that investment might represent company ownership, debt, revenue-sharing rights, or the right to receive equity in the future.

In simple terms, equity crowdfunding allows a company to raise money online from many individual investors instead of relying only on banks, venture capital firms, or a small group of wealthy investors.

A Simple Example

Imagine a growing food company wants to open a second location.

The company needs $500,000 but does not want to rely entirely on a bank loan or one large investor. Instead, it launches an online investment offering.

Its customers, local supporters, friends, family members, and other investors can review the opportunity and decide whether they want to participate.

One person might invest $100. Another might invest $1,000. Hundreds of people may make individual investments that, together, help the company reach its fundraising goal.

In return, those investors receive the security described in the offering.

That is the basic idea behind equity crowdfunding.

How Does Equity Crowdfunding Work?

Although every offering is different, the process generally follows five steps.

1. A Company Decides to Raise Capital

The company determines how much money it wants to raise and what the capital will help it accomplish.

It might use the money to:

• Launch a new product
• Hire employees
• Open another location
• Purchase equipment
• Build inventory
• Enter a new market
• Improve its technology
• Invest in marketing

2. The Company Prepares Its Offering

Before asking the public to invest, the company prepares information about the business and the investment opportunity.

This typically explains:

• What the company does
• Who operates it
• How much it wants to raise
• How the money will be used
• What investors will receive
• The company’s financial condition
• The risks involved

This information helps potential investors understand what they are considering.

3. The Offering Is Published Online

A Regulation Crowdfunding offering must take place online through a registered broker-dealer or funding portal.

The offering page allows people to learn about the company, review its disclosures, understand the investment terms, and ask questions.

4. People Decide Whether to Invest

Potential investors review the opportunity and decide whether it fits their interests, financial situation, and tolerance for risk.

Some may invest relatively small amounts, while others may invest more. Investment limits can apply to non-accredited investors.

5. The Offering Closes

Most offerings establish a minimum amount the company must raise.

Investor funds are held until the closing requirements are satisfied. If the company reaches its minimum and completes the closing process, it receives the eligible proceeds and investors receive their securities.

Under Regulation Crowdfunding, an eligible company may raise up to $5 million in a 12-month period. Transactions must take place online through an intermediary registered with the SEC as a broker-dealer or funding portal.

Is It Like Kickstarter or GoFundMe?

There are similarities, but the outcome is different.

With traditional crowdfunding, someone may contribute money in exchange for:

• A product
• A reward
• Early access
• A discount
• A thank-you gift
• The satisfaction of supporting a cause

That person is generally acting as a customer, contributor, or donor.

With equity crowdfunding, the person is making an investment. They receive a security that may offer the possibility of a financial return.

It also carries the possibility of losing the money invested.

Buying a product through a crowdfunding campaign is not the same as investing in the company that makes it.

What Does an Investor Receive?

The answer depends on the offering.

Despite the name “equity crowdfunding,” not every offering involves traditional shares of stock.

An investor might receive:

• Shares of stock
• An ownership interest
• A convertible note
• A right to receive equity in the future
• A debt security that may pay interest
• A security tied to company revenue
• Another type of investment

Someone who purchases shares may own a small part of the company. However, the shares may have limited voting rights or no voting rights at all.

Someone who purchases debt may be entitled to repayment and possible interest without becoming an owner.

The offering materials should explain what investors receive, what rights come with the investment, and how a potential return might occur.

Can Anyone Invest?

Equity crowdfunding opened many private-company investments to the general public.

You generally do not have to be wealthy or qualify as an accredited investor to participate in a Regulation Crowdfunding offering.

This means eligible everyday investors can participate alongside experienced and higher-net-worth investors.

However, limits apply to the total amount non-accredited investors can invest in Regulation Crowdfunding offerings during a 12-month period. The amount generally depends on the investor’s annual income and net worth. Accredited investors are not subject to those Regulation Crowdfunding investment limits.

The registered platform hosting the offering typically guides investors through this process.

Being permitted to invest does not mean every investment is a good fit. Private-company investments can be highly risky, and people should invest only money they can afford to lose.

Why Do Companies Raise From the Crowd?

Traditionally, private companies have often raised capital from a limited group of sources, such as:

• Banks
• Angel investors
• Venture capital firms
• Wealthy individuals
• Friends and family

Equity crowdfunding gives companies another option.

A business may be able to raise from people who already know and support it, including:

• Customers
• Employees
• Friends and family
• Local community members
• Online followers
• Industry supporters
• Existing investors

This can be especially valuable for companies with a strong product, recognizable brand, loyal customer base, compelling mission, or active community.

A successful campaign can provide capital while also increasing awareness and turning supporters into stakeholders.

However, raising from the crowd is not passive. Companies still need to prepare carefully, communicate clearly, comply with securities laws, and actively reach potential investors.

Publishing an offering does not guarantee that people will invest.

Why Do People Invest?

People participate in equity crowdfunding for different reasons.

Some want the possibility of earning a financial return. Others enjoy discovering private companies before they become widely known.

People may also want to support:

• A founder they believe in
• A product they use
• A local business
• A particular industry
• A mission they care about
• A company they hope will grow

Equity crowdfunding can feel more personal than buying a small piece of a large public company.

An investor may be able to follow the company’s story, use its products, share its mission, and feel connected to its progress.

That connection can be meaningful, but it should not replace careful evaluation of the investment.

Liking a product does not necessarily mean the company will succeed or that the investment will increase in value.

How Could an Investor Make Money?

The potential outcome depends on the company and the security being offered.

An investor might earn a return if:

• The company is acquired
• The company eventually goes public
• The investor can sell the security later
• The company pays dividends or distributions
• A debt security is repaid with interest
• A revenue-sharing security makes payments
• A convertible security becomes valuable equity

None of these outcomes is guaranteed.

Private companies often take years to grow. Some never provide investors with an opportunity to sell. Others fail entirely.

Equity crowdfunding should generally be viewed as a long-term, high-risk investment rather than a quick way to make money.

What Are the Potential Benefits?

Equity crowdfunding can expand opportunity for both companies and investors.

For Companies

A company may gain:

• Access to a broader group of potential investors
• The ability to raise from customers and supporters
• Greater awareness of the business
• A stronger community around the brand
• An alternative to relying only on traditional investors
• Investors who may also become customers and advocates

For Investors

An investor may gain:

• Access to private-company opportunities
• The ability to participate with a relatively small amount
• Exposure to companies in different industries and locations
• The chance to support a business they believe in
• The possibility of participating in its future growth

These are possible benefits, not promised results.

What Are the Risks?

Equity crowdfunding can be exciting, but it involves significant risk.

The most important thing to understand is that you can lose your entire investment.

The Company Could Fail

Many startups and small businesses do not succeed.

A promising idea, talented founder, popular product, or impressive campaign does not guarantee that the business will survive.

You May Not Be Able to Sell

Public stocks can often be sold quickly through a brokerage account. Private-company securities are different.

There may be no marketplace or willing buyer when you want to sell. Legal and contractual restrictions may also limit when a security can be transferred.

You may need to hold the investment for years, and you may never have an opportunity to sell it.

The Investment May Be Difficult to Value

Early-stage companies can be difficult to value because they may have limited revenue, short operating histories, or uncertain futures.

The valuation used in an offering is not a promise of what the company will eventually be worth.

Your Ownership May Be Diluted

A growing company may issue additional securities to employees or future investors.

This can reduce an earlier investor’s percentage ownership of the company.

You May Receive Limited Information

Private companies generally provide less frequent and less detailed information than companies listed on public stock exchanges.

Investors should not expect the same level of reporting they might receive from a large public company.

Returns Are Not Guaranteed

The company may never pay dividends, interest, distributions, or sale proceeds.

Even if the business continues operating, the investment may never generate a financial return.

How Is It Different From Buying Public Stocks?

When you buy stock in a public company, you are usually purchasing shares that trade on an established stock exchange.

You can typically see a current market price and may be able to sell your shares relatively quickly.

Public companies must also provide extensive financial and business information on an ongoing basis.

Equity crowdfunding generally involves private companies whose securities do not trade on a public exchange.

That means:

• The company may be smaller or younger
• Less information may be available
• The investment may be harder to value
• The risk of failure may be greater
• Selling the investment may be difficult
• A potential return may take many years

The tradeoff is that investors may gain access to a company at an earlier stage, before it is available on a public stock market.

Is Equity Crowdfunding Only for Startups?

No.

Early-stage startups often use equity crowdfunding, but more established businesses can use it too.

A company raising from the crowd may already have:

• Paying customers
• Revenue
• Employees
• Physical locations
• A finished product
• Years of operating history
• A recognizable brand

Businesses in many industries may consider equity crowdfunding, including consumer products, technology, food and beverage, entertainment, healthcare, manufacturing, professional services, local businesses, and more.

A company’s suitability for crowdfunding often depends on whether it has a story people can understand, a credible plan for the capital, and a community it can engage.

What Happens After Someone Invests?

After an offering successfully closes, investors receive the security described in the offering materials.

The company then uses the capital to operate and pursue the plans described in its offering, although its actual needs may change over time.

Depending on the company, security, and applicable requirements, investors may receive:

• Company updates
• Annual reports
• Financial information
• Tax documents
• Notices about important events
• Voting information
• Information about payments or distributions

Investing usually does not give an individual investor control over the company’s daily decisions. The founders and management team generally continue operating the business.

Communication, reporting, voting, payment, and transfer rights vary from one offering to another.

Who Oversees the Process?

Regulation Crowdfunding offerings are subject to federal securities laws.

The offering must take place online through a registered broker-dealer or funding portal. The intermediary operates the investment platform and performs required regulatory and investor-protection functions.

Companies must also provide information about their business, financial condition, ownership, offering terms, use of proceeds, and risks.

These requirements are intended to give investors useful information and provide structure to the process.

They do not guarantee that an investment is safe.

The government, the registered intermediary, and EquityCF do not guarantee that a company will succeed or that investors will earn a return.

Investors remain responsible for reviewing each opportunity and deciding whether it is appropriate for them.

A More Open Path to Private Investing

For much of history, investing in private companies was largely limited to wealthy investors and people with access to the right networks.

Equity crowdfunding gives more people the ability to discover and invest in private businesses.

It also gives companies another way to raise capital from the people who know, use, and believe in what they are building.

That broader access creates new opportunities. It also creates responsibility.

Companies must communicate honestly. Investors must understand the risks. Every offering should be evaluated on its own terms.

Equity crowdfunding does not remove the uncertainty of building or investing in a private company.

It simply gives more people the opportunity to participate.

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