Translating an innovative concept into a thriving business is a complicated and unpredictable proposition. For entrepreneurs without the resources to fund a startup out-of-pocket, it’s essential to secure adequate financing – often before the nascent company has any revenues – or even a marketable product – to speak of.
Traditional banks are often reluctant to fund vulnerable startups with what they perceive as unproven ideas. And though there are numerous nontraditional startup financing options, not all are suitable in all situations.
What Is Equity Crowdfunding?
Since the 2012 passage of the JOBS Act, which loosened longstanding federal restrictions on how and from whom companies can raise money, equity crowdfunding has been a viable option for U.S.-based startups and small businesses. In 2015, the SEC relaxed regulations even further through an expansive regulatory amendment known as Regulation A+. Regulation A+ dramatically increased early-stage companies’ offering capacity and expanded the pool of eligible investors, effectively bringing equity crowdfunding opportunities to small-time retail investors.
Like traditional crowdfunding through such platforms as Kickstarter and GoFundMe, equity crowdfunding allows entrepreneurs, early-stage companies, and nontraditional investment funds (often with real estate exposure) to raise substantial amounts of money. Each contributing individual gives a relatively small amount – typically at least $1,000, but sometimes less.
The key difference is that equity crowdfunding is an investment arrangement. During an equity crowdfunding round, an entity issues equity – shares of company stock – to participating investors on a proportional basis. Less frequently, early-stage crowdfunded companies may raise money through a combination of equity and debt, or debt only. However, debt arrangements are more common for later-stage companies.