Trends in Equity Crowdfunding
Equity crowdfunding has boomed in popularity in recent years.
In short, it allows investors to acquire a stake in a private company during its early formulative stage.
The method of raising the equity is open to both retail and institutional investors and, if properly marketed, can see young companies secure the finance to propel growth while speculators can get in on the ground floor of companies they see potential in.
The recent trend for companies to stay private for longer and the growing number of platforms facilitating such investment opportunities have led many investors to this alternative asset class as a way to diversify their portfolios.
The growth of equity crowdfunding can be attributed to several factors.
First, the introduction of the Jumpstart Our Business Startups (JOBS) Act in 2012 was a major catalyst in the growth of equity crowdfunding.
It made it easier for companies to raise funds from the public, allowing them to advertise their offerings in a much more public way than before. This has made it easier for investors and for companies to reach a larger audience willing to financially back them.
The online platforms provide a centralized marketplace where investors can browse and compare different offerings and make informed decisions. This has helped to democratize the process of investing in startups, allowing more people to access this type of asset class.
While there is a risk with investing through equity crowdfunding as there is through a company’s IPO, this growing level of awareness of the potential returns of investing in early-stage companies has helped to drive the growth of equity crowdfunding. Many investors are now turning to it as a way to gain exposure to potentially disruptive startups and early-stage companies that otherwise they may not have been able to access.
Equity crowdfunding allows investors to invest in startups and other young companies that may not have access to traditional financing as well as, if accompanied with an effective marketing strategy, spreading the word on their endeavors.
Additionally, investors can support a company without having to commit a large sum of money, as equity crowdfunding platforms often allow investors to invest as little as $100, which makes it an attractive option for those with limited capital (in most cases giving improved access to retail investors).
For the business seeking the funding, it allows them to retain control and the direction of travel for the company in exchange for an equity slice.
Many equity crowdfunding platforms offer a wide range of services to help businesses create campaigns and reach potential investors; as an important part of any successful equity crowdfunding campaign is attracting and growing a highly engaged community of advocates.
To demonstrate the rise of equity crowdfunding, a report by Forbes shows that by the end of 2019, equity crowdfunding had been established as a viable method of raising capital, encouraging more startups to launch campaigns.
In 2019, (1) equity crowdfunding raised over $100 million, and whilst many industries were affected by the Covid-19 pandemic, equity crowdfunding experienced tremendous levels of growth.
During 2022, (2) campaigns and platforms launched almost daily and, as a result, the industry raised over 900 million through RegCF and RegA+ equity crowdfunding raises.
Investors should recognize and accept the risks associated with investing.
Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.
You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.
Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.