Equity crowdfunding is particularly useful for start-ups and SMEs seeking to grow, particularly because it is so difficult to raise small amounts as share capital due to the extensive due diligence required by investors who don’t already know you.
Even when investors are interested, the share of the equity and control they may require can be an issue for the founders when the business is not yet profitable.
Investors in equity crowdfunding receive shares in the business and with them the prospect of receiving dividends as well as being able to vote and to hopefully sell their shares at a profit in the longer term.
The business must provide a detailed business plan with a lot of information about the key people as well as other supporting information before it will be accepted by a crowdfunding platform.
An example of a successful equity crowdfunding was E-Car Club that raised £100,000 for 20% equity from 63 investors. The online fundraising was organised by crowdcube.com with most investors subscribing small amounts although the largest was £15,000. E-Car Club is a pay per use scheme whereby club members have access to an electric car for a defined amount of time without having the expense of car ownership.
Research by the British Business Bank in 2014, however, found that the growth of crowdfunding had posed challenges to Angel investment networks because some angel investors were choosing to invest through crowdfunding instead.
The risks in equity crowdfunding include a relatively high failure rate for start-ups and the potentially lengthy wait for a return on the investment.
Equity crowdfunding platforms are regulated by the Financial Conduct Authority (FCA).