Over the last number of years, investors have been very excited about the developments in the investing world. One of these is investment or equity crowdfunding. Equity crowdfunding offers you the chance to invest in startups, established businesses, or real estate on a completely different level to the traditional investment.
What Is Equity Crowdfunding?
You’ve probably already heard of crowdfunding. It’s when someone asks ‘the crowd’ to contribute financially to a specific goal. It might be for some sort of medical treatment, or to self publish their novel, or it may even be to produce a product. You contribute some funds, but you don’t really expect to receive anything in return, except perhaps a thank you, or a sample.
Equity crowdfunding is different. It was part of the 2012 Jumpstart Our Business Startups Act in the USA. The JOBS Act meant that the SEC had to implement rules for equity crowdfunding. These rules and regulations meant that startups, and SMB’s could raise the capital they needed without being hampered by the red tape around issuing shares, and providing returns for the stakeholders.
That’s not to say that there are no rules, but equity fundraising makes it much easier for businesses to raise capital through investment. Initially, only accredited investors could invest, however in 2016, these opportunities were opened up to anyone. They’ve also become a global phenomenon, with platforms in many countries across the world.
How Do You Invest?
There’s a plethora of crowdfunding websites online. Some of them can only provide you opportunities with startups, where as others, like The Right Crowd, can offer you investment opportunities with established businesses who need capital for expansion.
When you want to invest through the site, you need to first make an account. You’ll fill in some personal information and complete the sign up procedures. Once you have opened your account, you can transfer in funds. Every platform has its own minimum investment, or minimum transfer amount. However, these minimum amounts are much lower than the number needed for traditional venture capitalism, or angel investment. Prior to crowdfunding, it wasn’t uncommon to have needed millions of pounds for even ground floor investing. Equity crowdfunding allows people to access investment opportunities that they simply wouldn’t have been able to in the past.
Before You Invest
When you’re investing, whether through equity investing, or traditional investing, it’s important that you do your due diligence. There’s always risk with any investment. Some equity fundraising platforms will do a certain amount of this for you by screening the business plans, or offering some sort of help to the business to improve their plan. Other platforms run similarly to peer to peer lending sites. You make an investment, and then you get your money back at point when the company starts earning a profit.
There are a few other things you need to consider as well.
You need to think about the kind of company you want to invest in. Some people consider a startup to be a risky investment prospect, so perhaps you would prefer to invest in a more established business. You also need to think about what kind of investment you want to make, and what you want to get out of it.
You usually won’t be able to withdraw form the investment. You have to wait until the company starts making a profit before you can sell your shares. Make sure that you are only investing capital you can live without for a while.
You should also be aware that there are tax incentives for equity investing, and a lot of the companies looking for investors are eligible. If you meet the requirements for the EIS, or Enterprise Investment Scheme, you could reduce your tax liability by up to 30%. If you meet the requirements for the SEIS, or Seed Enterprise Investment Scheme, you could reduce your tax liability by up to 50%.
Equity crowdfunding is an unconventional way to diversify your investment portfolio. It’s a great way to see incredible potential returns on your investment. Some investors have seen returns of almost 70%. This is why more and more investors are looking to equity fundraising for their future investment opportunities.