Equity crowdfunding has become an increasingly important component of today’s capital markets with the concept emerging in 2009. But what exactly is the definition of equity crowdfunding?

Equity Crowdfunding (sometimes referred to as simply “crowdfunding”, “Crowd Investing”, or “investment crowdfunding”) refers to the process by which average investors can invest as little as a $100 in early-stage private companies. Equity crowdfunding contrasts with older methods for small and medium-sized businesses to raise capital via angel investors, venture capital and private equity.

How it works

Equity crowdfunding is a mechanism that enables average investors to fund a startup. Investors give money to a business and receive ownership (equity) in exchange.

Ownership of a company through crowdfunding is no different, legally than owning publicly-listed common stock. As the business flourishes (or fails) its value will track the success of the business itself.

The Equity Crowdfunding phenomenon took off in recent years thanks to the April 2012 passage of the JOBS Act by President Barack Obama. The purpose was to give average investors the chance to invest in early-stage, high-growth companies.

Title III of the JOBS Act, passed in May 2016, changed the space forever. Title III – known as “Regulation Crowdfunding (Reg CF)” – gives everyone, regardless of financial background, an equal opportunity to invest money in private businesses.

Essentially, Reg CF granted any U.S. citizen that is at least 18 years of age the right to invest in an equity (or debt) offering on approved platforms, called funding portals. This process was once highly regulated and only reserved for “accredited investors,” aka millionaires.

While “Investment Crowdfunding” can take the form of any part of the capital structure (debt-based or equity-based) equity remains the common path. Almost all investment crowdfunding takes place on any one of the 80+ FINRA registered equity crowdfunding platforms that have sprung up.  Today, leading equity crowdfunding portals include:

Furthermore, Reg CF offerings can by made through registered broker-dealers. Some of the most common today are:

  • Dalmore Group
  • Dealmaker
  • Rialto Markets

Potential risks

As with any investment, there are risks to equity crowdfunding. Since most companies involved are new and untested, the chance of loss is high. This risk can be balanced out by owning a broad-portfolio of numerous different companies. As with all investing, diversification is key and helps to protect the average investor.

By only investing through well-recognized portals and only investing in what you know, you too can safely participate in the equity crowdfunding revolution.

What you need to know

Fortunately, Reg CF is regulated to protect investors. Though private, early-stage businesses will tend to be more volatile than public market companies, all companies listed on equity crowdfunding platforms are vetted by the platforms themselves for fraud and other investor protections, and are still regulated by the SEC.

The true benefit of equity crowdfunding is the chance to identify companies the investor believes in — and being along for the ride as an owner from the beginning. By only investing through registered crowdfunding intermediaries, sticking with what you know, and diversifying your crowdfunding investment portfolio, you too can join in on the equity crowdfunding revolution.