Startups and entrepreneurs often need to find creative ways to raise capital to fund their businesses. Crowdfunding is a popular method of nontraditional financing and, when done correctly, can offer a win-win for both investors and founders.
Most crowdfunding is conducted through online platforms. FortuneBuilders reveals the top 10 equity crowdfunding sites of 2022 and some helpful education information to help you launch your next crowdfunding campaign.
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10 Best Equity Crowdfunding Platforms
Whether you’re an investor looking to inject capital into a startup or a founder needing to raise capital, a crowdfunding platform is a great marketplace to find prospects. However, not all equity crowdfunding sites are created equal.
For instance, some sites only accept accredited investors, while others accept non-accredited investors. Security, ease of enrollment, user interface, and registration fees are other factors to consider. Generally, it’s recommended to go with the most reputable platforms to ensure ease of use and security.
Here are the 10 best equity crowdfunding sites of 2022:
AngelList is one of the oldest and most well-known equity crowdfunding sites. It was originally established to pair business owners and angel investors. You can browse individual company offerings, all of which are vetted by the site. Investors can also partner with an investor syndicate—a group of investors that are usually led by a renowned veteran investor. The syndicate pools money to finance companies—minimum investments are $1,000.
Fundable offers both perks-based and equity crowdfunding. The website’s strength is its intuitive company profile builder—good for companies that are serious about hitting their target fundraising goals. Know that the site doesn’t actually facilitate transactions—all transactions must occur outside the platform. Investment minimums tend to be around $1,000.
Microventures is one of the oldest equity crowdfunding platforms that caters to both accredited and non-accredited investors. This full-service investment bank offers a wide variety of industries and skews toward consumer-facing businesses. You can find opportunities in high-growth industries such as cannabis and biotechnology.
Non-accredited investors can get started for as low as $100. Accredited investors have access to more exclusive offerings with much higher minimums.
If you’re looking to dabble in crowdfunding without taking on too much risk, Republic presents a good option. Investors can find crowdfunded deals for as little as $10.
On the other hand, the average holding period is roughly four to six years. If you’re looking for short-term investment opportunities, you may want to look elsewhere.
Investors can find deals in sectors such as startups, video games, real estate, and cryptocurrency.
If you’re a fan of Shark Tank, then you may already be aware of StartEngine. Kevin O’Leary, popularly known as “Mr. Wonderful,” serves as the face and strategic advisor of this platform.
Investors can get in for under $500 and enjoy free product or service access. The platform also offers equity rewards and bonuses to loyal investors. StartEngine also offers a secondary market if you decide to sell shares.
EquityNet typically hosts companies that have consumer products or are involved with social enterprises (for instance, funding for real estate projects for the poor). But EquityNet also has a variety of single-asset companies, such as nursing homes and medical clinics. Transactions occur outside the platform, and investors must be registered to view a company’s financials.
If you’re an accredited investor looking for unique assets not found on most equity crowdfunding sites, take a look at Yieldstreet.
This platform is known to offer alternative assets. Examples include commercial aircraft, investment property refinancing, and supply chain financing. Members enjoy customer service access by phone or email, which isn’t always offered by crowdfunding platforms.
The investment minimum can range between $1,000 and $50,000, with the average at $10,000.
The founders of Wefunder were involved in the passing of the JOBS Act that enabled equity crowdfunding. The best thing about Wefunder is that investment minimums can be as low as $100, while other platforms often require between $500 and $1,000 to start. Still, this could be a great site for those investors who have less capital to work with. The platform also has a helpful function that allows investors to ask questions to company leaders.
SeedInvest takes pride in listing companies that have been highly vetted and are highly promising. Sure enough, most of the companies listed here are tech startups. The platform has an escrow system, allowing you to make direct transactions without an outside broker.
Localstake connects investors with small businesses, many of which are customer-facing. Investment minimums range from $250 to $500. The platform offers four investment options for entrepreneurs: revenue share loans, convertible debt, preferred equity, and traditional loans.
What is Equity Crowdfunding?
Equity crowdfunding is a practice through which a private company sells securities to online investors. The securities may consist of shares, convertible notes, debt revenue sharing, or a different type of asset.
Equity crowdfunding might sound similar to regular crowdfunding, like Kickstarter or Indiegogo. The main difference is that equity crowdfunding deals in securities rather than a discounted product or “thank you” perk.
The company that’s raising capital must decide:
Which type of security is being offered
How many securities are being offered
How much to charge for a single share
Most of the time, companies with the best terms and prices can raise the most capital.
Raising Capital Online
Like Kickstarter, Indiegogo, or GoFundMe, equity crowdfunding relies on online platforms to promote company offerings and to facilitate transactions.
But why aren’t equity crowdfunding sites as well known as the websites for regular crowdfunding?
Equity crowdfunding is a relatively new practice in the business world, and it wasn’t even legal until the JOBS Act was passed by the Obama Administration. A relatively small amount of businesses are utilizing equity crowdfunding, but the numbers are growing.
Sale of Securities
Kickstarter and similar crowdfunding sites allow companies to exchange perks for cash. The donors who give money may be rewarded with a discounted or free product, a personal “thank you” note, or some other gesture. Once the perk is delivered to the donor, the contract ends.
Equity crowdfunding deals in securities, so the people who buy aren’t just donors—they’re full-fledged investors in the company. The investors can hold their securities indefinitely.
A company may enjoy a particular advantage when raising capital through investors rather than donors. Shareholders are more likely to be invested in the success of the company. After all, the shareholders will turn a profit—potentially a big profit—if the company flourishes. Thus, they’re more likely to promote the company and ensure that it’s highly visible.
A company must carefully consider which securities it will offer to raise capital. After all, they will have to share profits with the shareholders, which can significantly affect the company’s budget and leadership compensation.
Historically, people have only been able to buy shares in public companies. Likewise, only public companies have been able to raise capital by selling shares. That’s a big dilemma for many small and medium-sized businesses. Launching an IPO is a tremendous financial burden, and only large companies have the means to handle it. In fact, the number of publicly-traded companies is declining each year.
Since smaller companies can’t sell public shares, they have difficulty raising capital. Small companies often have to rely on angel investors—wealthy investors who have money to invest and are optimistic about the company’s success (think of the investors featured on Shark Tank). But these investors are difficult to find.
If you were looking for a business to invest in, would you want to invest in a private company? Your money would be locked into the business for 5 to 10 years. Sure, you could make bank if the company became a resounding success, but for 5 to 10 years, you wouldn’t make any profit on your investment—you’d need to rely on other investment sources. For that reason, it’s mostly wealthy investors who buy into private companies.
That’s the beauty of equity crowdfunding. A company may sell to shareholders at a fraction of the cost of an IPO, and investors have more incentive to buy because there’s more liquidity. At any time, investors can sell their shares to an ATS or another interested buyer. Their money isn’t locked in for a set amount of time.
Restrictions on Offerings
Equity crowdfunding still has regulations that entrepreneurs need to follow. There are two different routes an entrepreneur can take: Regulation Crowdfunding and Regulation A+.
Under Regulation Crowdfunding, a company can raise up to $1.07 million annually. Companies can immediately start raising capital if they file Form C with the SEC. But if the company wants to raise more than $107,000, then it must have its financials reviewed by an independent CPA.
Regulation A+ essentially turns the company into a mini IPO that’s allowed to raise up to $50 million annually. But first, the company must hire a securities attorney and create a Form 1-A that’s submitted to the SEC for qualification. At a minimum, this process may take between 3 to 5 months. The company is also required to conduct a financial audit for the prior two years.
As you can see, equity crowdfunding is far more involved than your standard Kickstarter campaign!
Risks of Equity Crowdfunding
There are several major risks to equity crowdfunding, whether you’re an entrepreneur or an investor. Here are the key risks you should be aware of:
Fraud: The internet is full of scammers, and equity crowdfunding sites are not immune. Scammers could establish fraudulent companies and steal money from first-time investors. Always do thorough research on a company before you purchase equity.
Online Security: Hackers love to pry into any website in which there’s an exchange of money. Since equity crowdfunding is internet-based, there’s always a risk that a cyberattack will compromise your bank account information.
Higher Risk of Failure: Securing funding isn’t a guarantee that the business will succeed. When a company raises money through traditional means—like venture capital—they’re more likely to gain the assistance of seasoned professionals who can help the company navigate the pitfalls of a startup. Without that assistance, a company may be more likely to struggle.
Longer Period for Returns: New businesses usually take longer to develop a cash flow and turn a profit. It could take quite some time before your shares appreciate or yield dividends. On the other hand, public corporations may offer dividends from the get-go.
Poor Investment Options: Many companies turn to equity crowdfunding because they’re unable to raise capital through other means. Why can’t they raise money? Because the companies don’t offer a good product that’s likely to generate profit. You can find terrific companies to invest in, but many equity crowdfunding sites are full of businesses with dubious earning potential.
Advantages of Equity Crowdfunding
Equity crowdfunding has several advantages, too. Here are some of the ways that entrepreneurs and investors can benefit.
- Potential for Big Profits: Equity crowdfunding is high-risk, high-reward. If you invest in a company that becomes “the next big thing,” your investment could yield massive returns.
- Satisfaction: In the past, only wealthy investors had the capital to buy into startup companies. Equity crowdfunding has made it easier for new or less-wealthy investors to invest in burgeoning companies. And there’s a lot of satisfaction that comes with giving life to a new company—it’s arguably a better feeling than investing in a large corporation with thousands of shareholders.
- More Responsible: For entrepreneurs, raising capital through equity crowdfunding is far safer than opening a slew of new credit cards.
Equity Crowdfunding for Entrepreneurs
How do you know equity crowdfunding is the right move for your company? If you cannot secure financing from an angel investor or a banking institution, then equity crowdfunding may be a good way to raise capital. You might even be able to raise more capital than what a banking institution could offer.
Be sure that you’re prepared to comply with the regulations and that your company is ready to deal with investors. Although investors won’t take part in the company’s day-to-day operations, you may still need to hire investor relations personnel.
Equity Crowdfunding for Investors
Equity crowdfunding is just as risky—if not riskier—than buying corporate stocks. You’ll never know whether or not a company will succeed, so you’ll have to carefully consider the company’s financials, leadership, and business plan before investing.
This is the type of investment that makes up a smaller portion of your investment portfolio. You’ll want to rely primarily on more reliable types of investments, like index funds, exchange-traded funds, or real estate. Something like equity crowdfunding should be at the top of your investment pyramid. If your investment fails, you’ll still have other profitable investments on which to get by.
Equity crowdfunding is the practice in which private companies raise funds by selling shares to investors. Thanks to technology, equity crowdfunding sites facilitate these transactions by connecting investors with entrepreneurs and founders. Not only is crowdfunding an affordable way for startups to raise capital, but it also offers investors opportunities to pursue alternative investments to diversify their portfolios. Not all crowdfunding platforms are created equal. Be sure to refer to our list of the top sites to find a trusted platform that suits your investor personality.
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