Share crowdfunding invest new companies method - So far, investments in young or early-stage businesses seemed to be reserved only for wealthy people. This has changed.

Throughout the 2010s, a series of laws have opened up the field of investment, making it easier for both small private companies to raise capital and ordinary people to provide that capital.

This legislation has created a new type of investment mechanism: equity crowdfunding.

Like other crowdfunding methods, this involves harnessing the power of the Internet to raise money. However, unlike the reward-based model, where people make a profit by supporting the pre-sale of a project or company, this stock crowdfunding allows people to get a stake in a company.

Equity crowdfunding can be easy to do, but it's important to understand all its ins and outs.

Share crowdfunding invest new companies method

Equity crowdfunding is a method of raising capital for a trading company through the Internet, where in exchange for supporting that company, investors receive a share proportional to their investment.

To fully understand what it is and how this new method works, it is useful to understand what it is not.

First, online stock crowdfunding platforms are not like their more well-known crowdfunding counterparts, such as Kickstarter and IndieGoGo, where a considerable number of people give money to interesting projects in exchange for a free product, gift or other reward (as well as the satisfaction of the support they provide).

Nor are they places of peer-to-peer lending that allow many investors to make small contributions to borrowers who repay the money with interest.

Stock crowdfunding platforms are all about equity. In exchange for relatively small amounts of money, investors become shareholders of companies that raise funds through the platform. Their invested money buys them shares in the new or growing company. Since the companies are private, these are not publicly traded shares,but are a proprietary share.

Share crowdfunding invest new companies method

It is done through online platforms. But since the sale of securities (stocks) is involved, it can't be just any website.

The platforms must be operated by a licensed broker-dealer or registered with the Securities and Exchange Commission (SEC) as a "financing portal". They must also register as members of the Financial Industry Regulatory Authority (FINRA), which oversees brokerages.

Equity crowdfunding has its origins in the Jumpstart Our Business Startups (JOBS) Act of 2012. The law aimed to make the rules governing which companies could sell securities more flexible. With this in mind, it allowed small businesses to raise capital, but avoid the usual costly and onerous process involved in an IPO.

However, the SEC had to finalize some rules before the regulation could actually get underway. That happened over the course of 2015 and 2016, the latter with an amendment to the JOBS Act, known as Crowdfunding Regulation. Basically, these new rules allowed companies to sell shares without listing and lightened registration requirements for crowdfunding platforms.

Perhaps most important of all, they also allowed many more people to invest. Previously, you had to be an accredited investor, that is, someone with a net worth of more than one million dollars (815,395 euros) or an income greater than 163,079 euros per year for 2 years (244,618 euros for married couples).

Share crowdfunding invest new companies method

According to the SEC, anyone can invest in a crowdfunding offer of shares. However, due to the risks involved, you are limited in the amount that can be invested in a 12-month period. This depends on annual wealth and income and is calculated on a sliding scale.

For example, if an investor's annual income or net worth is less than about 87,000 euros, then their investment limit is 1,790 euros (approximately) or 5% of their annual income or net worth, whichever is greater. If both the annual income and equity are equal to or greater than 87,000 euros, the maximum is 10% of the largest income or net worth of the investor.

In 2020, the SEC increased the amount that companies can raise annually from capital crowdfunding from 1,386,000 euros to just over 4 million.

In terms of online crowdfunding platforms, there are many to choose from. While they all provide a mechanism for large numbers of people to invest in companies, they differ from each other in certain respects.

Some platforms, such as WeFunder and StartEngine, provide a place for companies to submit their proposals (called "offers") but do not conduct thorough research, leaving the investor himself to investigate the companies. Others, such as Republic and SeedInvest, present more selected offers on their platforms.

Share crowdfunding invest new companies method

In terms of procedure, they all generally work the same way. Investors register on the platform's financing portal page and verify relevant financial information such as their income and assets. Then, they can see all the offers available, including the price per share. They then make their selection and, depending on the platform, send their funds.

To track the investment, you can consult an online dashboard. In addition, an annual report and, in some cases, quarterly updates are received from the company.

What are the benefits?

People can get a stake in an interesting company with the potential to grow, thus receiving a share of the success of that company. They can also help a company they love take off or expand.

As for companies, they have access to a much larger pool of potential investors than they could have taken advantage of, a benefit especially useful for those who avoid venture capitalists, angel investors, or traditional financial institutions.

They also do not have to register their securities with the SEC, as long as they meet other reporting requirements.

Share crowdfunding invest new companies method

The financial conclusion

Crowdfunding platforms give ordinary people the opportunity to invest in start-ups and growing companies, an opportunity that was previously only open to the rich.

At the same time, these investments can be risky. Smart investors need to conduct careful research of both the platform and the companies they are considering.

Because investments are highly illiquid and it could take a while before they produce a return, investors should ensure that the money they invest is discretionary.