Equity Crowdfunding

Crowdfunding With Investor Benefits

While crowdfunding relates to a collective mechanism of financing a particular business, social or personal venture, equity crowdfunding allows people to invest funds in a startup or new ventures. In return, they receive a percentage of the company's common stock.

The core of this funding modality lies in a mutual relationship of trust where the share value and venture's growth are both tied with success amidst shareholders. Since investors need the company to succeed in making a profit, they act as brand ambassadors advertising businesses and products they are investing in. This is a significant feature in equity crowdfunding, as stated by investor Jon Gosier, who has invested in 16 companies in 12 African nations and has been developing the method among peers.

Gosier argues that "NGOs, donors, philanthropists, and governments all believe that money will solve all problems. So they send money and blame Africans when problems don't get solved," but sometimes the problem cannot be solved only by injecting money into businesses. Companies that manage to build a sense of connectedness with a given community's interest level usually show higher-growth potential, and this is the reason why they may benefit from strategies such as equity crowdfunding.

Investing in Equity

Equity crowdfunding not only offers the opportunity for middle-class people to be active in the space of investments, but it also allows people to support projects that match their ideals rather than focus on a product's revenue, a feature that differentiates this modality from the traditional financial market.

Additionally, equity crowdfunding also aims to reduce inequity in a way to tackle the problem of a shrinking middle class, as stated by Gosier: "There aren't a lot of ways for the middle class to develop wealth for themselves, and those options are getting smaller. We need to help the middle class generate wealth. Not staggering amounts, but enough to live comfortably. An environment isn't created in a vacuum. It takes contributing from all sides."

In 2019, fewer millennials were middle class compared to baby boomers when they were in their 20s as reported by MarketWatch. In the report Under Pressure: The Squeezed Middle Class released by the Organization for Economic Co-Operation and Development in 2019, the middle class has not grown since the middle of last decade, while incomes for the top 10% richest are reaching new highs, a development that is different from the mid-1990s to the mid-2000s scenario when "median real disposable incomes rose by about 17% in richer countries."

Indeed, despite the efforts to expand coverage of the social protection system, worldwide income inequality is on the rise, while access to opportunities remains unequal. Information and Communications Technologies (ICT) can be applied to reduce social fragmentation and duplication while optimizing accountability and customizing the social assistance system. If the equity crowdfunding methodology is applied to computing solutions such as Social Program Matching Database, it might work as integrative catalysts towards achieving inequality reduction and building the future's welfare ecosystem by delivering the right benefits to the right people at the right time.

Also, by integrating Blockchain-based Chamas it promises to increase transparency and provide faster micro-financing for people who desperately need the money. Since Chamas do not depend on government assistance, these technologies are especially relevant in regions of social instability, poverty, and political conflicts.

Setting up for Equity Crowdfunding

Not all businesses may find an advantage in this funding modality though. According to Judd Hollas, Founder and CEO of EquityNet (a platform for equity crowdfunding investments), there are three types of equity crowdfunding:

• Equity I: A result of the IPOnet, SEC No-Action Letter issued in 1996, this kind of equity crowdfunding allows investors to check private investment opportunities on a password-protected website. Most of the issuers who use Equity I rely on Rule 506 of Regulation D, a regulation that "allows them to raise an unlimited amount of capital from an unlimited number of accredited investors." This type of crowdfunding suits entrepreneurs who wish to avoid public exposure of their fundraising campaigns.

• Equity II: Relying on the Title II of the JOBS Act, this type of equity crowdfunding allows entrepreneurs to advertise their need for funding publicly. Founders engaged in this modality are able to raise an unlimited amount of capital from an unlimited number of investors, albeit all investments must be done through equity crowdfunding platforms by accredited investors. Since these portals make it simpler for founders to advertise their offerings, this modality of equity crowdfunding is the most popular because it exposes entrepreneurs to huge audiences of potential investors (an estimate of 6-8 million accredited investors only in the U.S.).

• Equity III: this modality allows unaccredited investors to participate, which holds to the vast majority of investors. Such platforms offer and sell statutory securities to entrepreneurs that have their projects exposed to over 50 million users. With such exposure to a larger audience of investors, this modality of equity crowdfunding might lack sophistication in their offered investments, which means founders will need to deal with more regulatory requirements in order to manage their projects.

Besides EquityNet, other platforms such as CFIRA offer specialized consulting to startups that want to join the modality, as well as news coverage websites such as Crowdfund Insider and Nowstreetwire are other resources that help entrepreneurs to draft their own crowdfunding business strategy.