Equity Crowdfunding: What It Is, How It Works & Platforms

By Martin Christensen
January 23rd, 2024
16 minutes read

Equity crowdfunding allows businesses to raise funds by enabling individuals to invest small amounts to become partial owners. Unlike traditional crowdfunding, where backers receive a product or thank-you, equity crowdfunding lets anyone invest as little as a few dollars to own a share of a company.

Image of how equity crowdfunding works
Source: P2PMarketData / Daiviet Huynh

Key Takeaways

  • Equity crowdfunding is a way for businesses to get money by letting regular people invest small amounts. In return, these investors become partial owners of the business.
  • Instead of just supporting a project for a reward or interest rate on a loan, backers become shareholders in the business. This means they can make money if the business succeeds in the long-term.
  • Equity crowdfunding platforms, such as StartEngine, Wefunder, Seedrs and Crowdcube, provide a simpler, and faster way for startups to connect with a diverse group of investors to raise funds.

What is Equity Crowdfunding?

Equity crowdfunding allows businesses to raise funds by enabling the public to invest small amounts and become partial owners. Different to traditional crowdfunding or lending-based crowdfunding, where backers might receive a reward or interest rate on a loan, equity crowdfunding connects investors to the company's long-term financial success. Instead of seeking large sums from wealthy individuals, businesses share their plans online, allowing anyone to invest even a few dollars to own a piece of the company.

Traditional crowdfunding, seen on platforms like Kickstarter, relies on a rewards or donation model, suitable for creative projects. Backers support causes without expecting financial returns, receiving perks or a sense of philanthropy. Equity crowdfunding, on the other hand, transforms backers into shareholders. They not only support a cause but also potentially gain returns through dividends, profit-sharing, or capital appreciation.

Differences include investor motivation and risk-return dynamics. Traditional crowdfunding emphasizes support, offering minimal risk and non-monetary rewards. Equity crowdfunding combines financial gain with support, involving higher risk and the potential for greater financial rewards tied to business performance.

Regulations also vary, with traditional crowdfunding facing fewer hurdles and equity crowdfunding subject to stricter measures to protect investors. Moreover, investor involvement differs; traditional crowdfunding backers typically have minimal involvement, while equity crowdfunding shareholders may have voting rights and influence business decisions, potentially engaging beyond financial support. In essence, traditional crowdfunding provides backers with tangible rewards, while equity crowdfunding turns backers into investors with the chance for financial returns based on the venture's success.

How Equity Crowdfunding Works

Equity crowdfunding is like an online matchmaker for startups seeking funds and investors seeking profit. Startups create persuasive pitches on crowdfunding platforms showcasing their strengths, market potential, and growth plans. Investors, armed with this information, research and choose startups to invest in, considering factors like the team, business model, and financial projections.

This crowdfunding approach benefits both sides. Investors get the chance for high returns and can spread their risk across various investments previously only available to venture capital funds. For startups, equity crowdfunding simplifies funding compared to traditional methods, drawing in a diverse group of investors. Successful crowdfunding investment campaigns not only secure funds but also validate business ideas, attract early supporters, and build a community of brand advocates. This community offers valuable market insights and direct customer feedback, enhancing the startup's understanding of its target audience.

In essence, equity crowdfunding is a win-win for entrepreneurship and high-risk investors, connecting ambitious startups with eager investors, and fostering growth and innovation in the business world.

Equity Crowdfunding Platforms

Crowdfunding, especially the kind where people can invest in startups, is becoming popular worldwide. The World Bank projects it could reach a market potential of $90 to $96 billion by 2025.[1] This means more startups and individuals are using crowdfunding to get money or invest. Equity crowdfunding is trending because it lets anyone invest in startups, no matter how much money they have. Regular fundraising for startups can be hard because it's limited to venture capital funds, costs a lot, and takes a long time.

Equity crowdfunding solves these problems by being simpler, cheaper, and faster. It helps startups connect with more investors and raise money quickly. In short, equity crowdfunding changes the game for startups, making it easier for them to get the money they need.

Republic

Republic has gained prominence in the crowdfunding world, standing out for its diverse investment options. Focused on US-based startups and entrepreneurs, the platform leverages the 2012 Regulation Crowdfunding (Reg CF) law, allowing non-accredited investors to invest in startups, crypto, video games, and real estate starting from $50. In the first half of 2021, Republic made a mark by becoming the first investment firm to facilitate a Reg CF offering, enabling Americans to raise up to $5 million in startup funding within a year, even without accredited investors. Republic boasts a community of more than 3 million investors and has funded over 2,000 projects, raising more than $2.6 billion on the platform.[2]

StartEngine

StartEngine is among the largest crowdfunding platforms in the US, having raised over $650 million for more than 550 companies through Reg A+ and Reg CF since its launch in 2014. The platform utilizes the passage of the JOBS Act in the US, enabling individuals to invest in startups, breaking down traditional funding barriers. At the same time StartEngine enables entrepreneurs to connect directly with a community to fund their ideas.[3]

Wefunder

Wefunder was founded in 2012 by Nick Tommarello, Mike Norman, and Greg Belote. Operating under Regulation Crowdfunding, the platform allows both accredited and non-accredited investors to support a diverse range of startups with low investment thresholds. The platform fosters community engagement by connecting investors with founders. Notably, Wefunder is a Y Combinator alum, enhancing its credibility and potential impact on the startup ecosystem. Wefunder boasts a community of more than one million investors and has funded over 3,240 projects, raising more than $691 million.[4]

Seedrs

Crowdcube, a UK-based crowdfunding platform established in 2011, seamlessly connects entrepreneurs in search of funding with a broad audience of investors. Crowdcube enables individuals to invest in early-stage and growth-focused businesses, exchanging funds for equity or other financial instruments. Crowdcube's impact extends across a diverse array of businesses, including those in technology, consumer goods, and various other sectors. Over the years, the platform has played a pivotal role in supporting the growth of startups and small businesses, contributing significantly to the evolution of the crowdfunding landscape in Europe. Boasting a community of more than 450,000 investors, Crowdcube has successfully funded over 1,300 projects, raising a total of more than €1.4 billion.[5]

Companisto

Established in 2012, Companisto, a Berlin-based equity crowdfunding platform, distinguishes itself through its diverse payment options. Global investors can contribute amounts ranging from €5 to €500,000 per investor, with no startup funding limit. The platform boasts a network of renowned business angels, corporate finance specialists, and venture capital firms. Companisto gained popularity by reaching a milestone in real estate crowdfunding for Weissenhaus, a five-star superior luxury resort, raising an impressive €7.5 million.[6] With a community of 149,705 investors, Companisto has successfully funded 312 projects, raising over €223.7 million in total.[7]

Equity Crowdfunding Fees

When you invest through crowdfunding platforms, they charge fees for things like managing transactions and ensuring successful fundraising. Let's take a look at the fees charged by some popular crowdfunding platforms.

Platform

Fees Structure

Republic

The administrative fee is 2%. It comes with a minimum charge of $5 and a maximum cap of $300.

The specific administrative fee may vary depending on the offering.[8]

StartEngine

Investors are subject to a 3.5% fee, which will be added to the share price.[9]

Wefunder

Bank ACH, Wires, or Checks:

  • Transaction Fee: 2%
  • Minimum Fee: $8 - Maximum Fee: $100

Credit Cards, Apple Pay, or Google Pay:

  • Transaction Fee: 5.5%
  • Minimum Fee: $8 - No Maximum Fee

These fees are one-time and do not recur for subsequent transactions.[10]

Seedrs

Investing in Campaigns (Primary or Secondary):

  • Fee: 2% (minimum £/€0.50, maximum £/€250).

Secondary Market Transactions:

  • Transaction Fee: 2% for both Buyers and Sellers.
  • Sellers making a profit: Charged a 7.5% carry fee on net profit.

EIS100 Fund Product:

  • Portfolio Fee: 2% taken from the capital invested.

Company Exit Fees:

  • Investors are charged a 7.5% carry fee on any profit per investment.

Broker Fees for Company Exits:

  • Administration Charge: £30.
  • Commission: 0.75% on consideration.For consideration over £10,000: Additional £1 Panel of Takeovers and Mergers (PTM) levy fee.[11]

Crowdcube

Investment Fee:

  • 2.49% for investments made in pitches.
  • A minimum fee of £2.49, capped at a maximum of £250.

Success Fee:

  • A 5% fee is applied only if there is a profit on the investment.
  • No charge if the investment does not make a profit.[12]

Companisto

Companisto does not collect any fees upfront. Instead, Companisto makes money by taking a 15% share of the profits (called "Carry-Fee") when the startup does well, profits are distributed to investors.[13]

Is Equity Crowdfunding Risky?

Equity crowdfunding is a two-sided coin. It has both risks and opportunities. When you invest in new and small businesses, there is a big chance you could lose all your money. But on the flip side, if the startup does well, your investment could grow a lot more than traditional investment vehicles. It's a bit like a bold adventure – there is a chance for big profits, but you need to be careful and do your homework because startups are unpredictable.

How is equity crowdfunding different from traditional crowdfunding?

Equity crowdfunding is like buying a piece of a business. You invest money, and if the business does well, you might make money too. It's common for startups. Traditional crowdfunding is more like giving money to support a project you like, and in return, you might get a reward, but not a share in the business’ earnings. Equity crowdfunding is closely regulated due to the financial risks, while traditional crowdfunding is less strict and is often used for creative or charitable projects. In a nutshell, equity crowdfunding involves financial risks and gains, while traditional crowdfunding is about supporting projects you believe in.

What is the difference between Kickstarter and equity crowdfunding?

Kickstarter is a reward-based crowdfunding platform where backers receive non-monetary rewards for supporting creative projects. In contrast, equity crowdfunding lets you become a part-owner by buying a share in the project or receiving a promise of future payment. It's like having a small piece of the pie, sharing in the success and potential profits of the business you are investing in.

Equity crowdfunding is legally permitted in many countries with varying regulations among financial authorities. The European Crowdfunding Service Providers Regulation (ECSPR), enacted by the EU in November 2021, harmonizes rules for crowdfunding platforms.[14] However, individual EU states may have additional regulations. In the U.S equity crowdfunding is legal under the JOBS Act, specifically, Regulation Crowdfunding (Reg CF), allowing small businesses to raise capital online from a diverse pool of investors, including non-accredited investors.[15]

Is crowdfunding private equity?

Equity crowdfunding and private equity are related concepts, but they are not the same thing. Equity crowdfunding involves raising funds by selling shares online to a large number of people. On the other hand, private equity entails investing in established private companies, typically with significant ownership stakes and active management. Although these concepts are related, they differ in terms of size, stage, and the extent of investor involvement.

Articles Sources

  1. World Bank: “Crowdfunding’s Potential for the Developing World (page 43)”
  2. Republic: “Homepage”
  3. StartEngine: “Leading the industry: $650M raised”
  4. Wefunder: “Homepage”
  5. Crowdcube: “Homepage”
  6. Crunchbase: “Weissenhaus - Funding Rounds”
  7. Companisto: “Homepage”
  8. Republic: “What fees does Republic charge?”
  9. StartEngine: “Is there any cost to investing?”
  10. Wefunder: “What fees do investors pay?”
  11. Seedrs: “​​What fees does Seedrs charge Investors?”
  12. Crowdcube: “What are the fees for investing on Crowdcube?”
  13. Companisto: “FAQ - How much does it cost to use Companisto?”
  14. European Comission: “Crowdfunding - What the EU is doing and why”
  15. U.S. Securities and Exchange Comission: “Regulation Crowdfunding”