How To Conduct an Equity Crowdfunding Campaign

As an early-stage business owner in the UK, you may need to raise funds at some point. This can be for various reasons, such as expanding your business, developing your product, or acquiring another business. Equity crowdfunding is one way of raising funds for your company if you are not listed on a public stock market. Equity crowdfunding, also called “investment-based crowdfunding”, is a way for businesses to raise money by offering shares to platform investors. If you have determined equity crowdfunding is the right avenue to raise startup financing, the next step is planning the campaign. This article will explain what is equity crowdfunding and outline some important legal and commercial factors to bear in mind when conducting an equity crowdfunding campaign.

What is Equity Crowdfunding?

Put simply, equity crowdfunding is where individuals invest in early-stage businesses which are not trading publicly. In other words, a business that is not listed on the stock market. 

This is beneficial to both the investor and the company. Firstly, investors can put their money into new and exciting early-stage businesses. In addition, the business can get alternative funding without going to a traditional investor, such as a bank.

As a result, your business could get lots of exposure without needing to appeal to wealthy investors.

How Does an Equity Crowdfunding Campaign Work?

A business looking to raise equity financing must approach a crowdfunding platform. This platform connects the startup with prospective investors looking to acquire small stakes in the business. Different platforms have different approaches. For instance, some operate in a specific sector, such as renewable energy or property. Others may only connect a startup with debt investors rather than equity investors. 

As a business seeking equity crowdfunding, you need the platform’s approval to pitch your company to investors. Therefore, most equity crowdfunding platforms have two key stages before you begin to raise equity financing, including the:

1. application to pitch to investors; and
2. pitching process. 

Most platforms are selective. That is, most businesses that apply to pitch to the platform’s investors are unsuccessful. Even those who join the platform may struggle to raise sufficient financing once approved to pitch. 

How Do I Run an Equity Crowdfunding Campaign?

Equity crowdfunding platforms will require you to register your business and apply to the platform. This application is an application to pitch to investors. Well-regarded and regulated platforms are selective, with less than 10% of applicant startups succeeding. 

The application process is an extensive and preliminary due diligence process the platform conducts on your business. In this sense, it is not unlike the due diligence processes that large publicly traded companies undergo for mergers and acquisitions and buyouts. 

The first stage application process proceeds in the following two steps:

1. Company and Director Checks

Platforms usually investigate:

• all records Companies House keeps on your business, including directors’ details and previous accounts; and
• solvency checks on the company, bankruptcy searches on all directors and extensive credit checks. 

Any emerging red flags will likely result in the platform rejecting your application. For instance, if you, as a company director, had a bankruptcy order made against you in the last six years. 

2. Financial and Legal Due Diligence

Some platforms undertake independent due diligence. Others allow you to create a first draft pitch for the platform to inspect your startup’s financial position and growth potential. This is usually a detailed dive into your business’s past, current, and future performance. It will expect you to furnish information related to:

• its growth potential; 
• employees and key personnel; 
• target audience and existing customers; 
• a detailed risk appraisal; 
• exit strategy; 
• past and forecast financial statements; and
• any outstanding loans or other debt financing.

Certain equity crowdfunding platforms will not permit businesses with outstanding bank loans or other debt to sell shares to platform investors. 

Valuation Considerations

Startups need to have an accurate valuation so that investors can determine how much to pay for shares. Unlike larger companies, obtaining a valuation for a startup is exceedingly difficult. In many cases, valuing the underlying assets against the liabilities is impossible. 

Startup founders often over-value their startups. Some platforms may require you to agree to a valuation before pitching. Others may allow you to pitch even if the platform disagrees with your valuation. However, investors are unlikely to invest in your startup if they think your business is over-valued. 

How Do I Prepare a Pitch?

One of the benefits of making a successful application is that well-regarded equity crowdfunding platforms will help you workshop your investor pitch. The focus should be convincing investors that the underlying business idea justifies their investment. You should clearly and accurately present relevant financial information while developing a persuasive appraisal of your growth strategy.

Is Equity Crowdfunding Regulated?

The short answer is yes. The Financial Conduct Authority (FCA), the UK’s chief financial services regulator, requires platforms that arrange equity investments to follow specific rules. These rules are intended to protect consumers and the market. 

Therefore, when looking for platforms, ensure they are registered with the FCA. You can look up all businesses registered with the FCA on their website. Each registered platform will have its regulation reference number. This should be visible at the bottom of the platform’s website and on emails and other correspondence. 

Should My Startup Instruct Advisers?

The most well-regarded equity crowdfunding platforms will treat most information you disclose in the application and pitching stages as legal representations. This means if anything you submit is not, in fact, true, you may face legal liability. For this reason, you may wish to instruct legal and financial advisers to help you prepare your application and pitch. More generally, certain financial advisers that work with startups can help you craft the ideal pitch.  

What Are the Benefits and Disadvantages of Equity Crowdfunding?

If you are running a crowdfunding campaign in the UK, the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme are both relevant pieces of regulation for your business. This is because both of these schemes offer significant tax relief to investors. 

As a result, equity crowdfunding can be a great way of raising funds for your business. You can offer up as much of your business as you like, and you can get help from the online crowdfunding platform. Equity crowdfunding also incentivises investors as the crowdfunding space in the UK is well-regulated (which boosts confidence), and it offers tax relief benefits.

However, a crowdfunding campaign can be time-consuming and does not guarantee success. Depending on your business and the industry you are operating under, you may also be in a saturated space and find yourself competing with other businesses for funding. 

Regardless, you may wish to use equity crowdfunding as an additional type of fundraising. You can use it to secure extra money while also looking for funds and financing from other sources. By diversifying your fundraising options, you can mitigate the risk of crowdfunding not working out for your business. 

Key Takeaways

As an early-stage business operating in the UK, you may need to raise funds at some point. One way of doing this is through an equity crowdfunding campaign. Equity crowdfunding is where you list your company on a crowdfunding platform and offer shares in your business to many potential investors. Importantly, you must not be trading publicly on a stock market to do this.

To conduct an equity crowdfunding campaign, startups need to go through a selective application process on crowdfunding platforms, where they undergo due diligence checks and provide detailed information about their business. It is essential to find regulated platforms authorised by financial authorities to ensure legal compliance and protection. Startups should accurately value their business and prepare a convincing pitch to attract investors. They may seek assistance from legal and financial advisers for the application and pitching stages.

If you need help with equity crowdfunding, our experienced startup 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. Call us today on 0808 196 8584 or visit our membership page.

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