What Is Equity Based Crowdfunding?

The concept of fundraising has been around for many years. However, as with many things, it’s gotten a bit of a facelift as we’ve powered ahead into the digital age. These days, the growing significance of the internet and online interaction in our lives has made things all about crowdfunding and it’s not difficult to see why. Crowdfunding is more than just something that gives people and entities like small businesses, independent artists, and independent philanthropists a way potentially reach millions of benefactors. It’s also a way to do so for little to no overhead and to build an audience of longtime supporters in the process.

The growing prevalence of crowdfunding sites such as IndieGogo and Kickstarter have only helped crowdfunding become even more popular. These days, it’s considered trendy and highly beneficial to help an individual or a company raise money for a stellar project that’s important to them. What’s more, benefactors often get to take advantage of truly unique rewards and payoffs for helping a given campaign reach its goals. Supporting crowdfunding campaigns that you believe in is a terrific way to help shape the face of the arts, modern industry, society, and more as well.

Where and When Did Crowdfunding Start?

People and companies have been lending each other money to help them facilitate things like new projects, business expansions, and more since time immemorial. However, crowdfunding as we know it today really only dates back to 2012 when platforms like the ones we’ve become so familiar with first rose to prominence with small businesses and other independent business people in need of funds for their projects. The term itself was first used in 2006 by Michael Sullivan as related to fundraising efforts for a video blogging network at the time.

Crowdfunding is also considered by experts to have some roots in a concept known as crowdsourcing. Crowdsourcing is actually an offshoot of outsourcing. It involves rationing out duties and responsibilities attached to a project or task to various members of the general public. People who take on such tasks as part of a crowdsourcing effort typically do so on a volunteer basis, but occasionally there may be additional incentives involved.

Crowdfunding really does follow a similar model. However, incentives to donate are almost always included as part of the package. This allows the campaign to appeal to a greater variety of people and ultimately has proven successful in the raising of more money overall. There are two major types of incentives attached to today’s crowdfunding campaigns – reward based incentives and equity based incentives.

How Does Equity Based Crowdfunding Work?

People active on the internet today are going to be most familiar with reward based crowdfunding, which allows people to collect actual rewards for donating within specific ranges to a given project. Rewards can and do cover just about anything depending on the campaign in question, but they’re almost always related directly to the project or the entity doing the fundraising. For instance, if funds are being raised to help publish a book, donation incentives could include copies of the book, tickets to book signings, or public acknowledgements on the author’s website.

Equity based crowdfunding is a bit different in that the incentives are different. Instead of simply scoring a piece of free merchandise, a one-time experience, or something similar in exchange for their donation, benefactors actually get to share in a piece of the pie as far as the budding start-up goes. The incentive to contribute to the initial funding is actually a small stake in the company itself, making the money given into more of an investment than a true donation. Those most interested in equity based crowdfunding opportunities are going to be those who are interested in truly investing in a valuable idea, project, or start-up business.

Equity based crowdfunding has only recently become part of the mix thanks to the legal approval of the JOBS (Jumpstart Our Business Startups) Act in 2012. The purpose of the act was to relieve brand new start-up companies of some of the burdens that typically come alongside federal regulations. Although the current rules and regulations are still pending finalization in February of 2014, they do in fact exist and need to be take into consideration by anyone considering this option as a way to fund their start-up.

What Are the Rules and Regulations Attached to Equity Based Crowdfunding?

As touched on above, the proposed rules and regulations from the SEC are pending final approval. However, it’s important to realize that they’re likely to become final either in part or in full in just a couple of months. For this reason, they should give anyone looking to crowdfund their next business venture some reliable guidelines to go by.

  • Companies raising funds through equity based crowdfunding can raise no more than $1 million worth of funds during any given 12-month period.
  • If a given investor’s net worth or per annum income meets or exceeds $100,000 they may invest no more than 10% of either their annual income or their net worth.
  • Investors with a net worth or per annum income less than 100,000 are likewise only allowed to invest up to 5% of either or an amount of $2000, whichever is higher.
  • Equity based crowdfunding campaigns need to be conducted via legitimate brokers and dealers.
  • Companies have an obligation to provide financial disclosure to the SEC, as well as file a disclosure document a minimum of 21 days before the first sale is made.
  • Disclosure documents need to include any and all relevant company info including listings of stakeholders (or more than 20%), officers, directors, and so forth.
  • Any advertising efforts made in regards to the campaign must be done in a way that ushers potential investors directly into the chosen broker-dealer portal.

What Are the Benefits of Choosing Equity Based Crowdfunding?

Although crowdfunding in and of itself comes along with a number of notable benefits for both the company owner and the investors, equity based options have some very unique ones of their own as well. Let’s take a closer look at what the benefits are of deciding to crowdfund your start-up business using this model.

Greater Return on Your Investment

Normally, someone looking to start a new business or develop a new product would need to look into options like business loans in order to make that happen. As everyone knows, a loan comes attached to quite a few additional financial obligations. To begin with, you’ll need to pay interest as you pay the principle off over time. Depending on your financial situation, you may also be required to put up collateral. Plus, your credit can be affected, which is critical in today’s world.

Crowdfunding allows you to circumvent all of these things. Also, since your start-up costs are covered by the donations you collect, you stand to enjoy a substantial return on your own investment in your future. Your investors will be able to do the same, as they’ll own a valuable piece of what you’ve created.

Reach a Huge Audience

Traditional fundraising models certainly allow an entrepreneur to reach plenty of people. However, equity based crowdfunding really takes the whole concept of fundraising through a whole new gate. Social media, SEO, and viral marketing techniques all allow you the opportunity to reach a massive number of people that previously would have been unheard of. Not only will you be able to put yourself in touch with major movers and shakers in your industry of choice, but you’ll reach millions who would love a chance to be part of the next Apple, Microsoft, or Disney as well.

Expand Your Reach

In the past, entrepreneurs had to pick and choose as far as the avenues they used to raise the funds they need. However, the proposed rules under the JOBS Act will allow you to have the best of both worlds. Not only will you still be able to reach out to major investors according to the traditional model, but you’ll be able to ride the wave of today’s crowdfunding trend and secure additional funding from members of the public who would love to be part of what you’re creating. You’re 100% free to create a fundraising strategy that really works for you.

Personal Involvement

Today’s investors are looking for more than just a solid project that might yield a return one day. They’re looking for something that they can believe in on an emotional and social level as well. The beauty of crowdfunding lies in the way it lets people make that sort of connection with the companies and projects they invest in. When handled correctly, a successful equity based crowdfunding campaign truly makes benefactors feel like they’re part of what you’re creating.

At the end of the day, using an equity based model when it comes to crowdfunding is considered by experts to be one of the lowest risk, most effective ways of obtaining the money you need to bring your vision to fruition. If you haven’t seriously considered the benefits as they apply to your project, then it’s high time that you did.

Should You Hire Equity Based Crowdfunding Marketing Experts?

Before you begin, it’s important to realize that after actually having a stellar business model in place as far as your project-to-be, the right expertise is the most important factor in whether or not your crowdfunding campaign will reach its full potential. Not only do you need to understand the ins and outs of making sure your campaign is seen by as many people as possible, but you need to make sure it’s seen by the right people and at the right times.

This is exactly why many entrepreneurs choose to hire a professional marketing firm to help them handle that aspect of their campaign. Let’s examine what a professional firm may be able to bring to the table for you.

Successfully reach your target audience.

While you may have a good idea of who the target demographic of your campaign may be, a professional marketing firm specializing in crowdfunding options is likely to have an even better understanding. They’ll also understand the best avenues by which to reach them, especially in regards to social media, mailing lists, and other similar options. Most importantly of all, they’ll have a thorough and very professional understanding of how to word your pitches and campaign copy to give it the best possible chance of forging a connection between you and potential investors.

They’ll know how to make sure any and all related press is properly optimized so that people find your campaign as well. Professional marketers will also be able to help you develop and stick to a time frame for your fundraising efforts to make sure that your milestones are all met in a timely manner.

Save yourself plenty of time.

Covering every base when it comes to crowdfunding all by one’s self is a challenge not many people are able to accept. You’ll need to market across multiple channels and stay on top of the numbers as far as your reach. This can take up the lion’s share of your time. That’s where a professional marketing team can really help. Let them take care of the nuts and bolts of getting the word out while you tend to other matters.

Take advantage of critical expertise.

At the end of the day, equity based crowdfunding is something that benefits from a lot of expertise and know-how on how to meet goals, stick to schedules, and connect with a target demographic. Professional crowdfunding marketers will have all of these things down pat, so you’ll have little need to worry if you make sure to go with a company attached to a solid reputation and a great history of helping other businesspeople succeed.

If you’ve been looking for a good fundraising solution for your start-up business and are seriously considering equity based crowdfunding, then you should be congratulated on an excellent choice. Start building the structure of your campaign today and step into a bright new future tomorrow.