• June 2019
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Equity Crowdfunding: The Good, the Bad and the Intriguing

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Depending on how you approach the process, investing can be a dull business or it can be an exciting, challenging opportunity. Over the past decade, a varied range of investment platforms have become widely available to potential investors of all stripes. From traditional venture capitalists with hundreds of millions of dollars at their disposal to average American dads dabbling in investments in their spare time, it seems that everyone can now get in on the ground floor of interesting investment opportunities if they only know where to look for them.

One of the most accessible forms of new investment platform types is equity crowdfunding. The broadest forms of crowdfunding are immensely popular and are accessible to virtually everyone. Sites like Kickstarter and Indiegogo allow the general public to back interesting creative projects, emerging technology and interesting products with minimal investments. Equity crowdfunding is more complex and subject to a greater degree of regulatory control. It also functions more like traditional financial investment opportunities than project-based crowdfunding does. And like relatively traditional forms of straightforward financial investment, equity crowdfunding shares many of the benefits and challenges associated with capital marketplaces.

The Basics

At its most basic, equity crowdfunding aims to support startup companies by allowing diverse investors to fund them in return for equity. Unlike more traditional forms of financial investment, equity crowdfunding is conducted exclusively online. When individuals invest in a given startup, they receive a small ownership share in return for their backing. If the startup does well, the value of an investor’s ownership share increases.

The primary reason why startups are targets of equity crowdfunding is that it is easier and safer for a diverse group of investors to help establish a risky startup without attaching that risk too significantly to any one investor. It also allows startups to seek necessary initial funding that may otherwise be too difficult to secure through traditional venture capital firms.

The Potential Benefits

In the United States and Canada, potential investors can be accredited or non-accredited. This means that regardless of an investor’s income or experience, he or she is legally allowed to invest in interesting business opportunities. For example, accredited investors in the United States must generally earn a significant minimum salary for a number of years or hold a net worth of at least $1 million in order to be considered accredited. Individuals need not have a specific income or net worth in order to participate in equity crowdfunding opportunities. And because equity crowdfunding is an online experience, potential investors can research opportunities and get in on the ground floor while couch surfing, if they so choose to do so.

Equity crowdfunding allows investors to cherry pick opportunities that intrigue them. For example, one of the most successful equity crowdfunding campaigns ever resulted in the launch of Uber. The 1.3 million Uber raised in order to fully establish has blossomed into a multi-billion dollar company. Each of the company’s initial equity crowdfund backers found the startup’s model to be inventive and now enjoys the spoils of their partial ownership interests. With risk comes the potential for great reward.

The Potential Challenges

Unlike broader forms of crowdfunding like Kickstarter, equity crowdfunding comes with no guarantees that one’s investment will either pay off in some way or be returned to the investor. If an individual backs a project on Kickstarter and the campaign’s initial financial goal is not met, the proposed investment will be returned to the investor. Equity crowdfunding investments are pure risk. If a startup does not fully establish or does not become profitable, investors are not entitled to receive anything in exchange for the risk they have taken.

Experience Matters

If you are interested in investing in equity crowdfunding opportunities, please consider reaching out to the team at LawTrades. Our experienced team can help guide you through any questions you may have about potential opportunities, risk vs. potential reward and reputable crowdfunding platforms.