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How equity crowdfunding works
Ideal for startups, investors provide funds in return for a stake in your business.
Looking for investors but don’t know where to start? You might want to look into equity crowdfunding platforms, also known as securities-based crowdfunding. Here, you can get connected with accredited investors and even everyday consumers willing to fund your business. The trade-off is that you’ll lose full ownership of your business, which can affect your future financing options and potentially the direction of your company.
What is equity crowdfunding?
Equity crowdfunding is a way for businesses and startups to find investors online. It’s particularly useful for business owners and entrepreneurs who don’t have built-in connections to venture capitalists or angel investors.
Unlike a loan, you don’t have to repay the money you receive. And unlike other types of crowdfunding, you don’t need to offer rewards for different levels of donations. Instead, investors provide funds in return for partial ownership of your business.
How does equity crowdfunding work?
Equity crowdfunding platforms work by connecting business owners with investors. First, a startup or business owner sets up an online profile with details about the business and its finances. This might include:
- Company overview
- Elevator pitch
- History of financing
- Pitch deck
- Business plan
- Profile of business owners
Once your platform is finished, set a fundraising goal and an end date and launch your campaign. Potential investors registered with the platform can log on and view your profile. If they’re interested, they’ll follow the platform’s procedures for drawing up a deal and investing in your business. At this point, many platforms take a percentage of the funds raised as a fee.
How long does it take?
Unlike rewards-based campaigns, equity crowdfunding campaigns typically don’t have a limit to how long you have to raise your funds. You can take a few weeks, a few months or even years to reach your campaign goal.
Some platforms might cover the upfront costs of your campaign, while others expect your business to come through. If you decide to withdraw your campaign before reaching your goal, your business generally covers those upfront costs.
Who can invest?
Both accredited investors and regular consumers can invest in businesses through equity crowdfunding, thanks to a 2015 Securities and Exchange Commission (SEC) ruling that allows the general public to invest in startups and young businesses with this method.
How much investors are allowed to put toward your business depends on the type of investor. Accredited investors, like banks or corporations generally don’t have any limits on how much they can invest. All other investors are limited to how much they can invest per year by their annual income and net worth.
How much can my business raise?
It depends on who your investors are. Businesses can raise up to $1.07 million from consumers through equity crowdfunding every 12 months, according to the SEC. Some states might have laws that further restrict how much businesses can raise with this method. Check with your state’s security laws — often called “blue sky laws” — to find out if any other limits apply.
If you’re working with accredited investors, however, you can typically raise more funds. Many equity crowdfunding platforms have minimum and maximum amounts, typically from around $1 million to $15 million.
6 top equity crowdfunding platforms to consider
Thinking about finding investors through equity crowdfunding? Get started by looking into these platforms.
1. CircleUp
CircleUp specializes in getting funds for businesses that offer consumer products in their early stages. It generally looks to work with businesses that make between $1 million and $15 million a year and are looking to raise between $1 million and $10 million in growth equity.
To sign up, your business has to fill out an application. CircleUp evaluates your application using a software called Helio, which determines whether you’re a good match for any of its investors. You can get started by emailing fund@circleup.com.
2. Crowdfunder
Crowdfunder works with a network of over 12,000 venture capitalists and angel investors to help startups at most stages get connected with investors. You generally won’t be able to find financing for a brand new startup, however. You’ll typically do better if you’ve participated in an entrepreneurship program with incubators and accelerators or have had interest from other investors and customers.
You can create a private deal room for free or sign up for a fundraising plan to get connected with investors starting at $299 a month.
3. Fundable
This platform offers equity crowdfunding from accredited investors ranging from $50,000 to $10 million for product, service and business-facing companies. Businesses that offer products to consumers can also create rewards-based campaigns for funds between $1,000 and $50,000.
Not all startups are eligible, however. Fundable has a long list of restricted industries and business plan types, including alcohol-related ventures, travel agencies, timeshare companies and more. Fundable doesn’t charge any fees after you set up your campaign, though your investors might.
4. SeedInvest
SeedInvest specializes in making fundraising easier. It covers upfront costs of getting funds with an investor, such as setting up an escrow account as well as legal and filing fees.
If your campaign is successful, however, SeedInvest charges a placement fee of 7.5% of the funds you raised and an equity fee of 5%. It’s also highly competitive — it only accepts around 1% of startups that apply. Generally, you need to have a high-growth company in its early stages with a valuation of around $2 million to $4 million to qualify.
5. Republic
Republic is part of a family of startup platforms that includes AngelList, Product Hunt and Coinlist. It has a 95% success rate for campaigns on the platform. Your business can get started with a quick online application on Republic’s website.
However, unlike other platforms, accepted businesses need to cover upfront costs that can start at around $3,000. And if your business reaches its funding goal, it’ll pay a fee of 6% of the funds raised. You’ll also be charged a 2% fee to use its Crowd Safe feature, which controls when or if interested investors become shareholders or owners.
6. WeFunder
WeFunder is made for small-dollar investing from friends, family and fans starting at $100. It has fewer restrictions on which types of businesses can qualify — though it’ll need to be for-profit. There are no upfront costs, and businesses pay a fee of 7% of the investment funds they raise to covers the cost of investment contracts, legal work and more.
How much does equity crowdfunding cost?
It depends on which platform you work with. Many platforms only charge a fee after you’ve been funded, usually around 7% of the investment amount. Some might also charge a fee for each month you use the service.
Another cost you need to worry about are the upfront costs of setting up and running a campaign. These include:
- Form C —$121.20 per $1 million. Startups are required to fill out and file a form with the SEC and its investors that describes its offering. Some platforms offer a service to help startups fill out this form, though your business might have to pay an additional fee on top of the filing costs.
- Escrow agent — around $1,500. Getting funds from an investor involves setting up an escrow account — where the money sits until the deal is done. It can get complicated, so some startups choose to hire an escrow agent to handle it.
- CPA — $1,000 to $4,000. If your company doesn’t already have its financials in order, it might want to hire a CPA to make sure everything is in top shape — or risk losing out on investments.
- Legal fees — around $1,500. Setting up an investor agreement and reviewing forms to submit to the SEC takes some legal expertise. You won’t need to pay this if you have in-house attorneys. Otherwise, some platforms might require you to hire legal services.
- Marketing — varies. Investing in marketing isn’t a necessity, but having a killer video and infographics can help your campaign succeed — especially if you’re using a platform that allows both consumers and accredited investors to fund your business.
Keep in mind that some platforms cover these upfront costs or wrap them into their fees, but not all do.
What types of businesses can benefit?
Equity crowdfunding could be most beneficial for any for-profit in its startup phase, especially those with founders that don’t have the connections necessary to get investments otherwise.
It’s not ideal for businesses that haven’t gotten off the ground yet, however. Some platforms have minimum revenue requirements. Others might ask that your business have a minimum valuation. Even if the platform doesn’t require this, you’ll still need to convince investors that putting money into your business has a good chance of becoming valuable.
Benefits and drawbacks of equity crowdfunding
Not sure if equity crowdfunding is right for your business? Weigh the benefits and drawbacks of using a crowdfunding platform to get financing.
Benefits
- Made for startups. Most equity crowdfunding platforms are designed with the needs of startups in mind, unlike most business lenders.
- No credit check. Your personal credit score generally doesn’t come into play when you apply for equity crowdfunding.
- Get connected with multiple investors. You don’t have to worry about one investor not putting up enough funds to cover your startup needs.
- Helps you make connections. If you didn’t go to an Ivy League business school and don’t have an in with the top venture capital firms, equity crowdfunding can help make up for that.
Drawbacks
- You lose some control. Trading equity for funding means you’re losing partial ownership of your business. Rely on equity investments too heavily and you could lose control of the direction of your business.
- It takes some work. Between the pitch decks and paperwork you need to file to set up your business’s profile and stay compliant with federal and state laws, equity crowdfunding might take more time and effort than your business can afford to spend.
- More regulation. You might need to keep those lawyers and CPAs on retainer to ensure your business is acting legally and regularly send financial reports to each shareholder.
- Upfront costs. Setting up an equity crowdfunding campaign can add up, and not all platforms cover the initial costs.
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Bottom line
Equity crowdfunding can help a startup get access to funding from multiple investors when they can’t qualify for business loans or other types of financing. While it’s typically more complicated than other types of business crowdfunding, it could be a great option for startups looking for large amounts they wouldn’t be able to raise from friends, family and fans alone.
Interested in more business financing options? Check out our guide to compare lenders and learn how it all works.
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