KEY POINTS

  • Equity crowdfunding is a form of alternative finance in which a group of people invest in a private company in exchange for shares. The process is facilitated by a digital platform. These platforms make money by charging a fee to the firm raising capital, the investors, or both. In some cases, they charge an additional fee if the firm is later sold. 
  • The model is one of the fastest-growing forms of alternative finance. It grew over 100% in both the UK and US in 2015. And BI Intelligence forecasts that in 2020, firms will raise $11 billion across both countries using equity crowdfunding, up from $1 billion last year. 
  • It's open to the general public. Recent legislative changes in the US mean almost anyone can now invest via equity crowdfunding. This provides firms that want to raise funding with a significant potential investor base. It's also used by accredited and sophisticated individual investors, as well as VCs and angel networks. Everyday investors get access to deals previously reserved for accredited investors and the likes of VCs, while more sophisticated investors get access to a flow of qualified deals. 
  • Equity crowdfunding presents significant opportunities to businesses. It offers firms diversity of funding sources, potentially easier access to funding, brand and marketing benefits, as well as the potential to retain greater control over their business.
  • Growth is being driven largely by increased awareness of equity crowdfunding among both investors and businesses. Press coverage of the recent changes in US law that allow nonaccredited investors to participate has driven up general awareness in the country. In the UK, a recent cut in interest rates has led many investors to seek out new investment vehicles that offer higher returns. 
  • The benefits equity crowdfunding provides to both investors and businesses mean that it's starting to threaten VCs and angel investors. This is especially true in the seed and early-stage investment market. In 2015, equity crowdfunding made up 16% of all seed and venture-stage equity investment in the UK.
  • As a result, VCs are increasingly investing via crowdfunding platforms. They are directly investing in firms, acting as lead investors in crowdfunding rounds, or running fund campaigns. VCs aim to benefit from the equity crowdfunding industry and protect their share of the larger equity funding market. 

Introduction

Equity crowdfunding is a form of alternative finance that's poised to [...]