What Is Equity Crowdfunding?

Raising money for a new business venture can be difficult, especially when your ideas are untested. The traditional way to raise the needed funds is by seeking out the assistance of a venture capital firm. However, there is a new approach that lets you instead seek to raise the funds you require from a large group of individual investors.

This approach, known as equity crowdfunding, is made possible by the interconnectedness of the online world. Because the Internet makes it so easy to reach thousands of people in a short period of time, you can easily create interest in your new venture. In exchange for the funds you require, you can offer shares in your new company to the crowd.

Crowdfunding generally refers to the process of raising money in small amounts from a large group of people (known as the “crowd.”) Instead of trying to find a single investor or group of investors who can provide a large amount of funding, you instead seek out a large number of smaller investors. For example, instead of finding one person who is willing to provide $10 million in funding, you can find 100,000 people who are each willing to provide $100.

Unlike with other forms of crowdfunding, this form requires you to offer equity in your company in exchange for funding. If your business succeeds, the value of these shares will rise and your investors will profit. If, on the other hand, your venture fails to do well, then your investors will suffer a loss. It is therefore important that you do a good job of selling your products to the crowd.

There are three main types of equity crowdfunding available at the moment. The oldest form is known as Equity I and was created in 1996 by the SEC. This form lets accredited investors find out about various investment opportunities by visiting a website that is protected by a password.

Rule 506 of Regulation D allows firms to raise as much capital as they want from as many different investors as they like. This type of funding is primarily used by entrepreneurs who do not want to make their attempts to find funding public knowledge. Because only investors who have the password can find out about these opportunities, it is easy to keep them quiet.

The second type, known as Equity II, was created by Title II of the JOBS Act in September of 2013. This allows entrepreneurs to advertise their desire for funding publicly. By using crowdfunding portals that let you reach a wide audience, you can raise as much as you like from as many accredited investors as you can find.

By choosing this type of funding, you can potentially reach as many as 6 to 10 million investors in the United States alone. While you have to publicly announce your need for funding, the benefits of doing so often significantly outweigh any costs. This type of funding has become quite popular since it was created.

Finally, the third type, known as Equity III, has looser requirements for who can invest. Rather than being restricted to accredited investors, under this program anyone can invest in a company. This means that ordinary men and women can purchase shares in your firm.  The Securities and Exchange Commission has proposed detailed rules to govern this type of crowdfunding.

By using this type of platform, you could reach as many as 50 to 100 million Americans. While many of them may not have access to significant amounts of money, the sheer size of the audience means that it may be a simpler task to raise the needed funds. However, because these investors are not accredited, there may be greater regulatory requirements that have to be met.

When you are interested in pursuing the equity model of crowdfunding, there are some important points to remember. First of all, you need to make sure that you have a solid business plan to present to potential investors. No one is going to fund your business if you cannot demonstrate to them why they can expect to earn a profit in the future.

In addition, developing such a plan will also make it easier to get your business off the ground. A good business plan will not only serve as a selling point for investors, but will also give you the blueprint that you need to make sure that your firm is able to get started.

There are quite a few legal requirements that must be met when you are attempting to fund a business venture in this way. Before you get started, you therefore need to make sure that you have a thorough understanding of the applicable rules and regulations. Hiring a corporate lawyer who has a great deal of expertise in this area can be an immense help. Here are some links to a top-ranked equity crowdfunding attorney located in Los Angeles, California that we recommend: Facebook page; and a very informative YouTube video.

In addition, having such legal representation demonstrates to investors that you are approaching this process with a professional attitude. They will be less concerned that you do not know what you are doing, so they will be more inclined to put their money behind your venture.

There are quite a few different platforms that can be used for crowdfunding, so you need to take some time and investigate your options. Different platforms have different strengths and weaknesses, so doing some research will help you find one that is best suited to your needs. For example, certain platforms may specialize in different types of businesses.

In general, it is best to work with an established platform that has a long track record of providing quality service. Look for one that has strong anti-fraud policies and a large population of vetted investors. By doing so, you can make sure that you are working with potential investors who are of the highest caliber.

When you are launching a new business, finding the funding that you need can take some time. Rather than automatically assuming you need the aid of a large venture capital firm, look into equity crowdfunding. Doing so may be the best way to quickly raise the funds that you need to succeed.

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