Crowdfunding is a broadly used term that refers to different ways of raising money from a large group of individuals. Equity crowdfunding is a structured process by which private companies raise small amounts of capital from many individuals through an online platform.
This type of raise differs from other types of crowdfunding in which startups or other private organizations raise money and offer swag, product, a future discount for the purchase of a product or nothing at all, in return for the financial contribution. This week, we’re taking a look at different types of crowdfunding and how they compare to equity crowdfunding.
Equity crowdfunding is essentially a sale of securities by a startup to investors. Under this umbrella, investors might receive equity, revenue share, a convertible note, or a similar stake in the company in exchange for a capital contribution to the startup’s funding raise. This type of crowdfunding offers an opportunity to invest in a startup rather than a perk such as eventual access to the startup’s product or service.
Regulation Crowdfunding is the equity crowdfunding framework that Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 put into place to offer non-accredited investors the opportunity to invest in startups. The Securities and Exchange Committee (SEC) oversees the applicable regulations for this type of crowdfunding.
Under Regulation Crowdfunding rules, all transactions of securities between eligible companies and their investors must take place online through a registered intermediary, which can be a broker-dealer or a funding portal. MicroVentures is an equity crowdfunding platform that makes startup investment opportunities accessible to both accredited and non-accredited investors.
Issuers (i.e., the startups raising funds) must adhere to maximum raise amounts per 12-month period (currently $1.07 million) for crowdfunding offerings, and individual investors are also subject to investment limits across crowdfunding offerings in a 12-month period (limits differ according to annual income and net worth thresholds).
Regulation Crowdfunding enables anyone who wants to invest in startups the opportunity to be a part of funding and taking a stake in a private company. This “stake” can be in the form of equity, meaning ownership of a portion of the stock or membership interest in the company.
Other securities offered under Regulation CF include promissory notes in which investors lend money to the company in exchange for the expectation that the company will pay back the principal plus interest, convertible notes and crowd notes, instruments that carry a provision to convert to equity after a pre-defined (generally an equity financing) event, and revenue sharing agreements.
Reward or perks-based crowdfunding takes place when startups offer pre-sale discounts, “free” products, or other incentives in exchange for capital. This type of crowdfunding typically supports tangible consumer products or forms of artwork, for example.
The individuals contributing to the crowdfund raise do not invest in the company. This is different than an equity crowdfunding offering that is selling securities with added perks provided as a thank you to early investors. You can learn more about these types of crowdfunding perks in our recent blog post “Understanding Regulation Crowdfunding Perks.”
Donation or philanthropic crowdfunding is possibly the most straightforward, as contributors simply donate toward a company (or cause) they want to help. This is commonly found in the realm of nonprofit fundraisers or arts-type projects. Instead of becoming an investor or receiving a product in this type of crowdfunding raise, those contributing funds are donating their money to the company or cause.
Ready to invest?
All types of crowdfunding achieve the goal of gathering funds from a large group through small individual contributions to provide capital. However, equity crowdfunding differs from the others in that financial contributors receive company securities exchange for their investment dollars. If you’d like to explore investing in a crowdfunding raise, check out the MicroVentures’ offerings page.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.