Equity crowdfunding explained
If you’re starting a new business, need money to put into growth or development or you’re trying to raise capital for a new product launch, getting the funds together can be challenging.
Historically, founders and entrepreneurs have pitched to investors to persuade them to part with their cash on the promise of big returns. However, there is now a new option open to businesses. Thanks to the digital age and online platforms, masses of people can now invest in your business. This is called equity crowdfunding.
What is equity crowdfunding?
Equity crowdfunding is a way of raising capital from a ‘crowd’ of people. Also known as crowd-investing or investment crowdfunding, it is mostly used by startups and businesses not yet listed on the stock market that need to generate money. The ‘crowd’ are investors using an online investment platform. They could be anybody donating any amount of money in return for securities in the company. Each investor is then entitled to a stake in the company that is proportional to their investment.
How does equity crowdfunding work?
The process of equity crowdfunding takes place on online platforms and offers a more open way of financing since anyone can tap into it.
Unlike traditional “dragons’ den” methods of pitching to a small group of professional investors, equity crowdfunding allows businesses and start-ups to raise capital from small contributions made by a larger number of investors via a digital platform.
How is equity crowdfunding regulated?
In the UK, equity crowdfunding is regulated by the Financial Conduct Authority which enforces prospectus rules on crowdfunding figures that go beyond £5 million.
There are also regulations in place to protect all parties on each platform, as the platforms assess each business using documentation they must provide to ensure that each business complies.
However, every equity crowdfunding platform is different. You should always do your research before you sign up or invest any money.
Are there any tax incentives for equity crowdfunding?
Certain equity crowdfunding projects benefit from tax relief, which is, of course, appealing to investors. Put in place by the UK government to offset some of the risks of getting involved with companies in their infancy, these types of equity crowdfunds can offer some of the most generous figures in the world. The amounts are as follows, as of 2023:
- Up to £250,000 under the Seed Enterprise Investment Scheme (SEIS)
- Up to £5m a year and a maximum of £12 million in your company’s lifetime under the Enterprise Investment Scheme (EIS)
What are the different types of equity crowdfunding?
Within each funding mission, there are terms to decide, and this is how to distinguish between the two types of equity crowdfunding.
Entrepreneur-led equity crowdfunding
Entrepreneur-led platforms offer deals to online investors who are going it alone. The entrepreneurs looking for investment set the terms of each deal themselves. This might include what the share price will be and how much the company is worth. The crowd can then choose which deals they want to back.
Investor-led equity crowdfunding
Investor-led platforms only list deals that have first been screened by experienced investors who are investing their own money, otherwise known as ‘angel investors’. The investor negotiates the terms with the business before the crowd has the opportunity to invest alongside the angels.
Read the full article: https://www.raisin.co.uk/investments/equity-crowdfunding/
