Crowd finance 101: ​How does equity crowd finance work?

March 07, 2017 • By TAB team

As part of our new ‘Crowd Finance 101’ series, we take a look at the nuts and bolts of equity crowdfunding

As part of our new ‘Crowd Finance 101’ series, we take a look at the nuts and bolts of equity crowdfunding.

What is equity crowd finance?

Equity crowd finance allows people to invest in early-stage, unlisted companies in exchange for shares.

It’s called 'crowd finance' /‘crowdfunding’ because funds are obtained from ‘the crowd’ – a global community of investors who monitor opportunities via online platforms.

How does it work?

Equity crowdfunding connects private companies seeking finance, with investors looking to achieve above-market returns on excess capital. This connection is made via equity crowdfunding platforms.

Here are the basic steps:

1. Investors need to become authorised in order to invest. UK platforms Seedrs and Crowdcube require completion of a questionnaire, or self-certification as a “high net worth individual” or a “sophisticated investor”, demonstrating they understand the risks involved.

2.Authorised investors can browse campaigns posted by companies seeking investment. These can include a description of the company’s offering, a business plan, a funding target and a valuation.
3.Once an investment opportunity is identified, platforms make it easy to invest. For example, Crowdcube and Seedrs allow investment from as little as £10. Investors pay for their investment before the campaign closes, or it won’t be executed.
4.Companies must reach their funding target within a set period (60 days on Seedrs, 30 days on Crowdcube), or investors get their money back. This type of funding terms are known as 'All or Nothing'. Once a campaign closes, funds are transferred to the company in exchange for electronic share certificates.

What are the risks?

Investing in startups – whether done via equity crowdfunding or other channels – can be a risky business.

The UK industry is regulated by the FCA in order to protect investors and encourage orderly market growth, however, the fact remains that investments have an inherent level of risk; investors may lose capital, investments could become seriously diluted, or shareholders may end up being unable to sell their shares for a long time.

So it’s important for investors to understand what they’re getting into. Depending on investment expertise, they can mitigate risk by diversifying their portfolio across a range of asset classes, or work with a financial advisor.

What are the rewards?

Investors can make returns in a variety of ways, including via dividends, acquisitions, or by a public offering, where the company gets listed on a stock exchange and shareholders sell their shares.

It takes time for investors to see a return on their capital, however, these returns have the potential to be significant.

Our view

Equity crowdfunding is an egalitarian movement that makes the world of startup investing more accessible and transparent. That’s a double-edged sword, as those who’ve invested in failed startups will tell you.

Easy access to inherently high-risk, early-stage ventures puts the onus on investors to do their homework. By making the effort to understand and support companies they invest in, investors can increase their chances of financial success. To do this, they need powerful tools to understand specific companies and the broader market.

Crowdsurfer Pro gives investors and company founders visibility on all aspects of crowd finance, with access to data on historical campaigns across platforms. This global perspective empowers decision-making and promotes better outcomes for everyone.