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Are you a business owner looking for ways to raise capital to finance the next stage in your business’ development? Suppose you are familiar with the general principles of debt and equity financing, but you are particularly curious about equity crowdfunding. This article will provide an overview of equity crowdfunding and then consider the risks associated with crowdfunding and how the equity crowdfunding process tends to work.
What is Equity Crowdfunding?
Equity crowdfunding, also called “investment-based crowdfunding”, is a way for businesses to raise money by offering shares to platform investors.
Equity crowdfunding is an alternative form of equity financing, different from selling shares directly to angel investors or venture capital and private equity funds.
There are three key parties involved in equity crowdfunding. These include the:
- business selling its shares;
- platform that links the business to potential investors; and
- platform users that buy shares in your company.
Risks of Equity Crowdfunding
As a business owner, there are two principal risks with equity crowdfunding:
- ensuring you comply with specific laws related to how shares in your company are marketed to the public; and
- choosing the right equity crowdfunding platform.
Generally speaking, you cannot market your shares to the public unless you are publicly traded. But, practically, if you partner with the right FCA-regulated and compliant platform, this will not be an issue for you.
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Choosing the Right Platform
You will want to ensure that you partner with the right platform to meet your needs. Each platform will have different capabilities and fee structures, so you must do your due diligence to ensure you are picking the right one.
As a matter of prudence, you may consider only partnering with platforms that the FCA regulates. This ensures that they operate within the bounds of the law.
Preparing for the Crowdfunding Process
The exact process for raising capital through crowdfunding depends on the platform. However, there are several general things you will want to get in order before you approach a platform.
Running the Numbers
You will need to know how much money you need to raise because this will be the “target” that the platform will advertise to investors. Therefore, you may have to meet your target to receive the funds in some cases.
Preparing a Pitch Document
Your investors will want to know why they should be investing in your company. To this end, you will want to prepare a pitch that details all of your business’s strengths and how your business will use the equity it raises.
Networking
You will want to leverage your professional network as early as possible, letting your friends, family, and colleagues know of your plan. This is because the more visible your business is, the more likely it will be able to crowdfund successfully.
Organising Your Records
Most platforms will undertake a due diligence process to investigate your business’s financial performance and ensure it is a business they are prepared to market to their investor base.
Essential records to prepare in advance include:
- all of your company’s accounts dating back to its incorporation;
- contracts you have with customers, clients, and suppliers;
- employment contracts;
- intellectual property you license or own; and
- if your company has been involved in any litigation or arbitration proceedings, you will want to have all the relevant documents prepared for the platform’s inspection.
Reaching Out to the Platform
Before contacting the platform, you should ensure that you have followed all the preliminary steps. In addition, some platforms may have particular requirements, so ensure that you have been thorough in your research.
Launching the Fundraiser
You will likely have to go through a series of steps with the platform before you can “go live”, such as complying with their own internal due diligence process and interviewing various members of the platform’s team.
Key Takeaways
Equity crowdfunding is a way to raise equity financing in your company. Your business will partner with a fundraising platform and then market your business to its investor network. You will need to partner with a platform that meets your needs and is appropriately regulated. Additionally, you will also need to make a compelling case to both the platform and the crowd of investors why your business is worth investing in.
If you need further guidance, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. So call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Equity crowdfunding is a way to connect investors with your company through platforms that will market your business to their network. If you succeed in raising the money, the investors will own shares in your company.
In addition to the risks inherent to all equity financings, equity crowdfunding relies on a third-party platform that connects businesses to investors. Therefore, you want to ensure that the platform is regulated correctly, adds value to your fundraising, and the fee structure is appropriate to your business needs.
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