What is Crowdfunded Equity? A Beginners Guide to Equity Crowdfunding

 

On March 20, 2019 truCrowd, Inc., launched its fourth regulation equity crowdfunding portal. Musicfy is a platform dedicated to the music industry. An independent record label called L2 Records is the first offering to appear on Musicfy.

L2 is offering investors short and long-term exit on their investment. Everyday people can take part in the music industry by owning a small piece of L2 Records.

What is crowdfunded equity or equity-based crowdfunding? Read on to learn more.

Crowdfunded Equity

Equity crowdfunding invites people to invest in a company during its earliest stages. 

At this point, the companies are not listed, meaning they are not yet on the stock market. People invest in exchange for company shares. Being a shareholder means they own part of a company.

Should that company do well, investors stand to make a profit. Of course, there’s always the risk of losing their investment should the company fail.

Equity crowdfunding platforms have allowed anyone to become an investor. It’s no longer reserved for the wealthy and venture capitalists.

Selling Securities

With equity crowdfunding, startup companies sell securities rather than products. They offer securities as equity in the company, revenue shares, or convertible notes.

Entrepreneurs enjoy the control that crowdfunding equity offers. They decide what and how much to sell, and at what price. They set the terms for potential investors. And, they set expectations about how much capital they wish to raise.

Private Companies, Public Investors

In the past, the public could buy shares in public companies only. Though, the number of publicly-traded companies are declining. Becoming a public company is expensive. Most startups and small-to-medium businesses cannot afford to do so.

The unfortunate results are that smaller companies can’t create liquidity for shareholders. So, investors have fewer investment opportunities. Though, private companies can raise capital through equity crowdfunding from public investors.

Creating Liquidity

Historically, investing in private companies meant waiting until the company went public to reap the rewards. There was no liquidity to their investment if any.

For wealthy investors, this wait is manageable. Not so for the less affluent investors. With crowdfunding equity, investors can trade their shares on public markets.

Equity crowdfunding rules allow companies to have more shareholders before they go public. This creates liquidity because the investor is not bound by the old lock-up period.

They can sell their shares on an ATS after a year. More shareholders result in a broader market. The larger the market, the more liquidity in the investment.

Why Don’t More Businesses Take Part?

Equity crowdfunding is still a new concept. Only about 1,400 of the 6 million businesses in the US have adopted it. President Obama signed the JOBS Act in 2011, which permitted equity crowdfunding.

In 2015 and 2016, the government implemented two regulations that limited crowdfunded equity. With Regulation Crowdfunding, companies can raise up to $1.07M per year.

To raise more than $107,000, a CPA needs to review the company's finances for the past two years.

Regulation A+ is also the mini IPO, and it enables companies to raise up to $50M per year. But, before the company can raise capital, it must hire a securities attorney.

Companies must also conduct a financial audit going back two fiscal years. They can collect investor information when the SEC qualifies their offering. But, they can’t raise any capital until then.

Many entrepreneurs are still learning about the regulations surrounding equity crowdfunding. This deters many from undertaking the venture.

Entrepreneurial Investing for Everyone

Crowdfunded equity allows both entrepreneurs and investors to engage in entrepreneurial investing. While the regulations surrounding it are new, the concept is very American.

After all, all large companies started as small ones. And the American Dream, like equity crowdfunding, is not only for the elite and wealthy.

To learn more about investing, visit our blog again for more articles like this one.

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