Equity Crowdfunding for Business Funding and Growth

Equity crowdfunding is a game-changer for businesses looking for funding and growth. It allows companies to raise capital from a large number of people, typically through an online platform.

By offering a small percentage of ownership in exchange for investment, businesses can tap into a vast pool of potential investors. This approach has been shown to be particularly effective for startups and small businesses.

Equity crowdfunding platforms typically charge a fee for their services, which can range from 4% to 7% of the total amount raised.

The concept of equity crowdfunding was first proposed in 2000 in Russia, where a business entity was suggested to operate crowdinvesting processes for entrepreneurs and small businesses.

The first known baseline design of equity crowdfunding was facilitated with a computer database, providing information on business plans and offering professional risk-assessment services to investors.

In 2007, the first equity-based crowdfunding platform was launched in Australia, called the Australian Small Scale Offerings Board (ASSOB), which is now known as Enable Funding.

Enable Funding has successfully raised over $150 million for 176 private companies, with an impressive 78% of these companies still trading profitably at the end of 2017.

The first US-based company to launch a model for startups to raise investments directly on their site was ProFounder, which unfortunately shut down due to regulatory reasons in 2011.

Early platforms in the UK, such as CrowdCube and Seedrs, were also among the first to offer equity crowdfunding services to investors.

The regulation of equity crowdfunding is a complex and evolving field, with different countries and jurisdictions having their own approaches.

The JOBS Act, signed into law by President Obama in 2012, allowed for the participation of both accredited and non-accredited investors in equity crowdfunding.

The SEC has been given approximately 270 days to set forth specific rules and guidelines that enact the legislation, while also ensuring the protection of investors.

Regulation A offerings place limits on the value of securities an issuer may offer and individuals can invest through crowdfunding intermediaries.

An issuer may sell up to $1,000,000 of its securities per 12 months, and, depending upon their net worth and income, investors will be permitted to invest up to $100,000 in crowdfunding issues per 12 months.

Regulation CF offerings prescribe rules governing the offer and sale of securities under new Section 4(a)(6) of the Securities Act of 1933.

Individual investments in a 12-month period are limited to the greater of $2,000 or 5 percent of annual income or net worth, if annual income or net worth of the investor is less than $100,000.

In 2021, the limits of a 12-month raise were updated from $1.07M to $5M, and lobbyists are currently looking to increase the limits to $10M over a 12-month period.

The SEC approved regulations and opened a 90-day public comment period on October 23, 2013, and Regulation CF went into effect on May 16, 2016.

China has endorsed equity crowdinvesting as part of financial innovation to solve financing difficulties for small and medium enterprises, with the first eight equity crowdinvesting platforms approved by the China Securities Regulatory Commission (CSRC) in January 2015.

Estonia is home to the largest equity crowdfunded company, Change, which has raised over €20M to-date. The first equity crowdfunding system was launched in August 2015 by Fundwise.

The United Kingdom has a well-established regulatory framework for crowdfunding, with the Financial Conduct Authority (FCA) regulating loan-based crowdfunding and having approved multiple equity crowdfunding platforms, including Seedrs Limited in July 2012 and SyndicateRoom in March 2014.

Canada's largest equity crowdfunding platform, FrontFundr, has enabled over 40,000 backers to invest in excess of $200m in more than 175 businesses since its launch in 2015.

Some U.S. states have enacted their own crowdfunding exemption laws to facilitate intrastate investment offerings that are already exempt from federal regulation.

The Invest Kansas Exemption and the Invest Georgia Exemption are two examples of state-specific laws that have been effective since August 2011 and December 2012, respectively.

The Invest Georgia Exemption has a $1m/$10k cap, and both Michigan and Wisconsin have joined Kansas and Georgia in enacting similar laws.

As of April 2013, Washington and North Carolina were considering their own crowdfunding exemptions.

Wisconsin allowed crowdfunding to raise up to $1 million from non-accredited investors without audited financial statements, or up to $2 million if the issuer had audited financial statements.

China was one of the first countries to endorse equity crowdinvesting as a solution to financing difficulties for small and medium enterprises.

In November 2014, Prime Minister Li Keqiang mentioned equity crowdinvesting in a State Council address as a way to promote financial innovation.

On January 20, 2015, the China Securities Regulatory Commission (CSRC) approved the first eight equity crowdinvesting platforms.

Estonia is a leader in equity crowdfunding, with the largest crowdfunded company, Change, having raised over €20M to-date.

The first equity crowdfunding system in Estonia was launched in August 2015 by Fundwise.

Estonia has a Good Practice of Crowdfunding guidelines, set up by Finance Estonia industry association and Deloitte in 2016, which provides a framework for responsible crowdfunding practices.

Funderbeam, an equity crowdfunding platform, is the only one in Europe licensed for trading of investments in a secondary marketplace.

This platform is licensed by the FCA (UK), EFSA (Estonia), and MAS (Singapore), demonstrating its commitment to regulatory compliance.

The United Kingdom has a well-regulated crowdfunding market, with the Financial Conduct Authority (FCA) overseeing consumer credit and loan-based crowdfunding since 2014.

Abundance Generation was the first debt crowdfunding platform in the UK to be regulated by the Financial Conduct Authority, being approved in July 2011 and launched to the public in 2012.

Seedrs Limited was launched in July 2012 as the first equity crowdfunding platform to receive regulatory approval from the Financial Services Authority, now known as the FCA.

In March 2014, the FCA published a policy statement regarding crowdfunding, marking a significant milestone in the UK's regulatory framework.

CrowdCube was authorised by the FSA in February 2013, and SyndicateRoom was authorised by the FCA in March 2014 as the first investor-led equity crowdfunding platform.

In May 2014, Crowd for Angels launched, becoming the first debt and equity crowdfunding platform authorised by the Financial Conduct Authority.

Eureeca became the first international platform to receive regulatory approval from the UK's Financial Conduct Authority in March 2015.

Capital Cell, a specialist platform for biotech and life sciences crowdfunding from Spain, launched its subsidiary in the UK and received regulatory approval from the FCA in September 2017.

In Canada, equity crowdfunding has been thriving through platforms like FrontFundr, which has enabled over 40,000 backers to invest in excess of $200m in more than 175 businesses since its launch in 2015.

FrontFundr's success is evident in its 2023 numbers, where 63 businesses successfully raised an average of $583,000, backed by an average of 59 investors each.

A significant portion of the funds raised on FrontFundr go towards finance and real estate, accounting for almost 86% of the total amount raised, which was $36.7m.

The platform's track record is impressive, with 91% of all businesses that have raised funding on FrontFundr either still operating or having achieved an exit.

Republic is an equity crowdfunding platform that operates alongside Europe's leading equity platform Seedrs, which it acquired in 2021. Seedrs is authorized to raise funds through the whole European Union of 27 countries.

Republic offers a diverse range of investment opportunities beyond just startups, including real estate, video games, and even crypto companies. This makes the platform a good fit for investors seeking a variety of investment options.

The platform caters to both individual investors and institutions, and its special "Deal Room" features select private deals co-invested with top venture funds. Republic focuses on higher-risk, unlisted investments compared to some other platforms.

Equity crowdfunding platforms have undergone significant changes since the introduction of the JOBS Act in 2012. The law allowed both accredited and non-accredited investors to participate in equity crowdfunding.

Before June 16, 2015, equity crowdfunding was limited to accredited investors and was conducted by a licensed broker-dealer or funding portal. Notable platforms for accredited crowdfunding include Angel Studios, Wefunder, and AngelList.

On May 16, 2016, Title III of the JOBS Act's Regulation CF came into effect, allowing equity crowdfunding regardless of net worth or income. It must be conducted by a licensed broker-dealer or via a funding portal registered with the SEC.

As of 2017, 25 funding portals have registered with the SEC and FINRA to operate in the United States. Wefunder became the first successful platform to hit the $1 million raise maximum in the first months following the law coming into effect.

Regulation Crowdfunding, or Regulation CF, was adopted by the SEC in 2015 to implement crowdfunding provisions of Title III of the JOBS Act. This regulation provides an exemption from the registration requirements of the Securities Act for certain crowdfunding transactions.

Online platforms operating under Regulation CF are expected to provide investment access via equity crowdfunding as early as mid-May 2016, pending SEC approval.

Equity crowdfunding has made it easier for businesses to access capital. Online platforms allow entrepreneurs to showcase their projects to a larger number of potential investors.

With equity crowdfunding, businesses can raise money from a larger pool of investors, rather than relying on a few institutional or angel investors. This democratizes access to business funding, avoiding any perceived bias.

Smaller equity crowdfunding platforms cater to specialist business sectors, such as the movie and video industry, or serve ethnic minorities. For example, Seed & Spark is a platform for the movie and video industry, while The BOX and Vesterr cater to African-Americans.

Equity crowdfunding can also help startups that intend to disrupt markets and established business models. These startups often struggle to get investment from VCs and institutional lenders.

Here are some benefits of equity crowdfunding for businesses: