Glossary

Equity Crowdfunding

Equity Crowdfunding

Looking for an innovative way to raise funding? Joining an online equity crowdfunding platform can be a great way to reach out to loads of potential investors. It's particularly useful for start-ups and newer companies with a brilliant idea that just need the cash to make it happen. 

How do you define equity crowdfunding?

You might already be familiar with the concept of crowdfunding. If not, it's where a large group of people each put in a relatively small amount of money to fund something. It can be anything from a new product to a gesture of goodwill. If it's for the development of a new product, those who contribute could get gifts or early release versions as a reward.

But what about equity crowdfunding?

Well, it's the same thing. The only difference is what people get in return for their "investment". Let's say you're a start-up with a bright idea that strikes a chord with members of the public. To make that idea come to life, equity crowdfunding is a way to get those people to chip in.

And when a large group of people each put in a small amount each, it helps you to get the cash you need. In exchange, your 'investors' take a small stake in your new business. It also enables anyone to invest in your business – not just high net worth individuals or private equity firms.

The popularity of this form of funding is growing too.

In the UK, the total value of equity-based crowdfunding went from under £30 million in 2013 to £550 million in 2020. Online platforms may have certain requirements that your business needs to meet. But the amount you want to raise and how long you have to do it can often be decided by you. And, if it leads to success, then every person who contributed money will share in it.

What can I use equity-based crowdfunding for?

In theory, you can use equity-based crowdfunding for almost any business reason. It's typically better suited for start-ups looking to bring their ideas to market. But that can take a number of forms too – whether it's hiring staff to research and development. And people will know exactly what they're investing in because you'll tell them via your chosen crowdfunding platform.

Bringing new ideas to life

All companies have to start somewhere. But if you have an idea for a new product or service, a big challenge is getting the money to bring it to market. Equity crowdfunding for SMEs is a way to get the cash you need by appealing to people's needs, wants, and emotions.

Research and development

You've got a product that's done well. But you want to take things to the next level. It'll call for research and development to discover what the market wants. By going to the public with your plans, you can raise the much-needed capital that lets you do just that.

Growth and recruitment

If success is becoming too much for your start-up to keep up with, the solution is to grow your operations. This can mean new staff, premises, or technology. New and existing advocates can be an important source of support – and that's where equity crowdfunding comes in.

How equity crowdfunding works

In equity financing , companies can get the funding they need by 'selling' shares to investors. It means there's no debt to repay over the months and years ahead. But it does mean more input at management level from the people or organisations who agree to provide funding.

This type of funding can come from wealthy people or private equity firms . But it's not all in the hands of a select few. Equity crowdfunding is a newer type of equity financing. And, as its name suggests, it lets a 'crowd' of people invest in your business – normally with smaller amounts.

So, how does that happen?

First, you'll need to join an online equity crowdfunding platform. These act as a broker between your business and potential funders. And there are two main types of crowdfunding platforms – investor-led and entrepreneur-led.

With an investor-led platform, your business will be screened by an investment expert. They will set the terms, before inviting the public to invest. For an entrepreneur-led platform, you can set your own terms – such as how much equity you're prepared to offer and for how much.

It's then a case of setting how long you want your crowdfunding campaign to run. This can be a length of time based on how soon you need the funds. Or you might not have a deadline. Either way, encouraging people to invest sooner rather than later can help to spread confidence.

What do I need to join a crowdfunding platform?

The most important thing is to show people that your business is worth their investment. If you can't do this, why should they give you any money?

You can improve your chances by doing the groundwork beforehand. In equity crowdfunding, a person is ultimately signing up to share in your success. If you've produced business plans and forecasts to show how you'll make that happen, it'll provide much-needed assurance.

Some equity-based crowdfunding platforms also have their own requirements. This means they might do their own checks on your business. You could be asked to supply financial information and Companies House filings, for example. Before listing, check with the platform you choose.

It's worth bearing in mind that all UK equity crowdfunding is regulated by the Financial Conduct Authority (FCA) under the Financial Services and Markets Act 2000.

Is equity-based crowdfunding right for me?

It can be hard to get funding for your business – especially in its early stages. By turning to the public via crowdfunding platforms, you can raise money without taking on debt or calling on the big-hitting private equity market.

This type of commercial funding could be right for you if you're developing as a business – from the initial start-up stages to the point you're ready to take the next steps. Your annual turnover will also be relatively small.

But there are other things to consider too.

Are you prepared to give up part of your business (however small) in return for funding? Do you think you have a robust enough case that'll convince people to invest? How much do you need – and how soon do you need it? Equity crowdfunding can sometimes be a long game.

If you're not yet sure if this is the option for you, don't forget the other choices you have. As an expert provider of alternative finance solutions for UK SMEs, it may be that we have the ideal solution. Why not find out? Get in touch and talk to one of our specialists today.

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    Can I seek equity crowdfunding?

    Three factors will determine if your start-up or business can access equity-based crowdfunding.

    Your business

    Your business will need to meet certain criteria before seeking equity crowdfunding. There are often age and turnover limits. But you're also likely to need to have detailed financial reports.

    Your ambitions

    What are you hoping to achieve? While equity crowdfunding can be used for almost any cause, there are limits to how much you can raise – particularly without a dedicated prospectus.

    Your platforms

    A crowdfunding platform will have its own requirements as to whether you're a suitable option for potential investors. If you are, you'll also have to think about the platform's fees.

    Equity crowdfunding FAQs

    What are the advantages of equity crowdfunding?

    Of course, there are many potential benefits of equity crowdfunding. The first – and arguably most appealing – is that it opens up your fundraising efforts to a much broader audience. So, when you're not awash with options, it could be the answer.

    It can also be used to complement other forms of external finance you might obtain.

    In dealing with members of the public, equity crowdfunding can be a brilliant way to attract a group of investors who are truly behind your plans. It can help build an emotional connection with your funders; creating an army of advocates who want to see you succeed.

    Don't forget that equity-based crowdfunding also involves smaller amounts of money. Unlike private equity investment, for example, the amount of control that you'll give up in exchange for that funding won't be as much. If you don't want it to be, that is.

    And because equity crowdfunding comes under the watchful eye of the FCA, it helps to make sure that platforms are safe and secure for investors and businesses alike.

    What are the disadvantages of equity crowdfunding?

    For a business looking to raise capital, the big disadvantage of equity crowdfunding is that you don't simply get it. There's no obligation on members of the public to invest in your hopes and ambitions. And if a campaign fails, it fails – you don't get what is already pledged.

    You need to make sure that platform fees work with your business plan. These can include fees for listing on a specific platform, card processing fees, legal fees, and success fees. And it could all add up to take a huge chunk out of the total you thought you'd raised.

    Can you give me some examples of equity crowdfunding?

    Some of the biggest names have achieved success through equity crowdfunding.

    Scottish beer brand Brewdog started out small – but it's now a business that's worth $2 billion. Part of its success is driven by 120,000 people who snapped up around 22% of the company.

    Then there's gaming company Paradox Interactive, which generated $11.8 billion via an equity crowdfunding platform called Pepins.

    Not every equity crowdfunding campaign will grab the headlines in this way. But there are lots of smaller firms and start-ups who have benefited from this way of raising capital.

    Is equity-based crowdfunding regulated?

    Yes. Under the Financial Services and Markets Act 2000, the FCA oversees equity crowdfunding in the UK. It also offers advice for people who might be thinking about investing.

    The Financial Services Compensation Scheme (FSCS) provides "very limited" protection for any potential investors too. Some platforms will even indicate that FSCS protection is not available.

    What platform should I choose?

    In the UK, there are numerous crowdfunding platforms that allow businesses like yours to seek investment from members of the public.

    Some are tailored towards all SMEs and have a minimum investment level of just £10. Others, meanwhile, can be more specific – designed just for start-ups or for certain sectors. And these can also have higher minimum investment amounts.

    In deciding the right platform for you, it's always worth checking the fees. And some platforms can also offer support and advice for your campaign. So, see if your preferred option does.

    What do investors get out of equity crowdfunding?

    As with all equity financing , this form of crowdfunding is a two-way street. In exchange for the funding they provide, investors get a share of your success. But what does this look like in real terms? Well, the hope is first that your plans and forecasts come to fruition.

    If successful, your business should get to a point where you can pay your shareholders.

    It could be an annual dividend based on your profits. Or they might get a lump sum as a share of the proceeds if you decide to sell your business to another. Apart from money, shareholders might also get voting powers on the important decisions that affect your company’s future.

    Are there incentives for people willing to invest?

    To help encourage people to invest in your company, there are a couple of incentives available from the UK government. Both of these provide tax relief on any investments made through an equity crowdfunding platform.

    Enterprise Investment Scheme (EIS)

    Under the EIS, you can raise up to £5 million each year – up to a maximum of £12 million. But you can only benefit from the scheme in the first seven years that follow your first sale.

    For investors, the main benefit is that they can get up to 30% income tax relief. This is subject to a maximum investment cap of £1 million per year, however.

    As this relief applies to each individual, a married couple could invest £2 million a year and still qualify. But that tax relief doesn't kick in until you've held shares for at least three years.

    You can also defer capital gains tax.

    Seed Enterprise Investment Scheme (SEIS)

    SEIS is aimed at companies that are looking to raise cash when they first trade. Like EIS, this gives tax relief to people who hold shares – whether that's via equity crowdfunding or another method. Your business can receive a maximum of £150,000 through this initiative.

    In return, someone can claim 50% income tax relief on investments up to £100,000. Tax relief is only available, however, once your business has either spent 70% of the invested funds – or has been in business for four months.    

    H3: What are my other commercial finance options?

    Not sure that equity crowdfunding is the right solution? Don't think you'll be able to raise the funding you need? No problem! At Nucleus, our range of alternative funding solutions means the perfect solution could be a phone call away. All our funding solutions are tailored to your exact needs. And that gives you the best chance of getting to where you want to be.

    Get in touch with us today for a consultation and quote. 


    BY Jessica Lambert

    4 August, 2022

    5MIN

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