As crowdfunding took off, serious investors noted that something was missing from the process. While savvy investors want to put money into a promising crowdfunded product like Pebble or COOLEST Cooler, they want more than an early edition of the product or a branded T-shirt for their efforts. This difference has made crowdfunding more of a consumer process than one that attracts serious investors.
Equity crowdfunding brings traditional investing into the picture, allowing investors to put their money into companies they believe in. Instead of receiving a product, these investors get equity in the business. Sites like Crowdfunder and EquityNet are among the sites springing up with this offering, making it easy for investors to connect with great opportunities. If you’re seeking investment dollars, here are a few things you should know about equity crowdfunding.
1. It is SEC approved.
Both investors and entrepreneurs have kept close watch on the battle over the legality of equity crowdfunding. In late October, the Securities and Exchange Commission approved the selling of securities through crowdfunding. The creation of new rules relating to equity crowdfunding opened up investors to buy a stake in businesses they believe in online, which also opened up businesses to connect with investors in new ways. A private company can now post information about itself online and hopefully have that information seen by the very investors who are searching for solid investment opportunities.
2. Other countries have seen success.
The U.S. is a little late to the equity crowdfunding game, compared to other areas of the world. In areas where equity crowdfunding has been active for a while, growth has escalated rapidly. This could be good news for the U.S., where equity crowdfunding is just getting started. Businesses can gain an edge by setting up a profile as soon as possible, while competition is still at a minimum.
3. Anyone can invest.
Until now, when businesses were interested in seeking investment dollars, they’d immediately think of accredited investors. With equity crowdfunding, there are no accreditation requirements for investors. That means anyone from an angel investor to the bag boy at the grocery store can buy stake in businesses on these sites. This means entrepreneurs can reach out to friends and colleagues or attend crowdfunding events to put in money alongside the investors who see a business as a wise investment. Once a profile has been set up on one of these sites, business owners then have a place to direct people who ask about investing in their efforts, in addition to the strangers who will see it.
4. You’ll still need a solid business plan.
If you’re meeting with potential investors, you put time in beforehand creating a solid business plan that will win them over. With crowdfunding, a business can get away with only having marketing and manufacturing plans in place before getting started. However, most investors will still want to see extensive information on a business before buying a stake. The more information you can provide that shows your business has its act together, the better your chances of reaching your fundraising goal.
5. Funding has limits.
While the SEC may have approved equity crowdfunding, it does come with funding limits. Investors who make less than $100,000 annually can invest$5,000 or 5 percent of their income each year, whichever is greater. That limit increases to ten percent of income for those making more than $100,000. As a business, you’ll be limited by the amount you can raise before you have to start answering to the SEC. Once you’ve brought in more than $20 million in funding, you’ll deal with stricter reporting requirements. However, this one nuisance shouldn’t stop business owners from raising as much as they possibly can through these platforms.
Equity crowdfunding is an exciting new way for businesses to bring in funding. Now that these platforms are recognized by the SEC, investors can easily connect with great opportunities and businesses can reach investors they wouldn’t have met otherwise.
This article was originally published on Entrepreneur.com.