What is Equity Crowdfunding?

Last Updated: 14 Oct 2024

In the world of finance, a new force has brought about a revolution in the way companies raise capital and empowers individual investors like never before. Yes, we are talking about equity crowdfunding!

This innovative crowdfunding form has completely changed the traditional models of investment by allowing entrepreneurs and investors to seek funding from a broad investor community with the help of online platforms.

This article will focus on exploring what is equity crowdfunding, how it works, and what benefits it offers. Get ready to explore the dynamic force that fosters innovation and growth across a plethora of industries.

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What is Meant by Equity Crowdfunding?

Equity crowdfunding is a particular kind of crowdfunding that helps businesses and individuals in raising capital for their ventures or projects by offering equity or ownership stakes through online platforms to a large number of investors. This allows enterprises and companies to gather small amounts of money from a large pool of investors instead of from a single investor.

How Does Equity Crowdfunding Work?

After knowing crowdfunding meaning, it is essential to understand how equity crowdfunding works, and it is essential to know the steps that are involved in the entire procedure. Let’s look at all the steps in detail:

Step 1: Selection of a platform:

The entrepreneur or the companies seeking funds selects an equity-crowding platform

Step 2: Creation of the pitch:

A compelling pitch is created by the company that outlines its business plan or idea, competitive advantage, market opportunity, and financial projections, among many other relevant information.

Step 3: Valuation and equity offer:

The concerned company determines their business’s valuation on the basis of which they take the decision regarding how much equity they intend to offer against the required funding.

Step 4: Campaign listing:

Next, the crowdfunding campaign is listed by the company on the chosen platform.

Step 5: Marketing and promotion:

To target and attract investors, the company promotes crowdfunding across various online and offline channels.

Step 6: Participation of the investor:

Investors who find the offer interesting visit the platform and review the pitch of the company as well as financial information to make the decision about whether they want to invest.

Step 7: Fund Accumulation:

As the investors start investing in the campaign, funds are accumulated by the platform.

Step 8: Funding Goal And Closing:

Every campaign entertains specific goals for funding within a predetermined duration. The campaign will be considered successful if the goal is accomplished within the predetermined time frame and the company receives the fund from the escrow account. If the goal is not accomplished, the investors get their funds back.

Step 9: Distribution of equity:

Once the campaign is successfully completed, equity shares are issued by the company to every investor on the basis of their investment proportion in relation to the total funding. The investors become the company’s partial owners, which is then recorded in legal documents.

Step 10: Post-campaign communication:

The post-campaign communication helps maintain ongoing transparency and builds trust to keep investors informed about their investments.

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Conclusion:

To conclude, equity crowdfunding undoubtedly offers various benefits to both individual investors and companies seeking access to capital, but it is important for investors to conduct thorough research before committing funds to any crowdfunding campaign.

On the other hand, it is also important for companies to plan their campaigns carefully and ensure they comply with the relevant regulations to make the most out of the crowdfunding opportunity.