What is equity crowdfunding?

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Equity crowdfunding is the phrase used to describe a person or company raising funds from a large number of people (the crowd). 

Equity crowdfunding has been fueled by the growth of the internet, allowing companies and individuals who previously could only reach small networks and sums of money to now reach much wider audiences and in turn raise more money. 

For the first time since the signing of the Securities Act of 1933, anyone, regardless of wealth, can invest in private businesses, not just the ones trading on stock exchanges, and they can do so online.

Now everyone can be an investor, not just wealthy venture capitalists, connected professionals and private equity firms.

How does it work?

Equity crowdfunding is when a company raises funds from a large number of investors in exchange for equity in that company. For the individual investor, this means that when they invest they become shareholders in the company. 

 

What makes this different from other types of crowdfunding? With rewards, donation and debt-based crowdfunding, when you pledge funds you do not own any part of that company. With equity crowdfunding, when you invest, you become a beneficial shareholder of that company with full benefits, risks, and return on investment... instead of simply pre-paying for a product.

Introduction to the new Equity Crowdfunding rules

How much can you raise?

Equity crowdfunding was born when President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) in 2012. The JOBS Act allows companies the option to raise funds through multiple different state and federal regulation exemptions.

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Companies can also raise capital on Prime Crowdfunding through Regulation D 506(c), through which companies can raise an unlimited amount of money, but only from accredited investors.

Other types of crowdfunding

Debt Crowdfunding:

  • When a large group of investors all make a small contribution to a company or person who is looking to borrow money, in return for that loan being paid back with interest over time (otherwise known as peer-to-peer lending). Funding Circle and Zopa are two popular peer-to-peer lending platforms.

 

Reward Crowdfunding:

  • When people invest in a project they are passionate about, in return for some reward (usually non-monetary) such as getting a product, free tickets/gifts, or recognition in some way. Kickstarter and IndieGoGo are two popular reward-based crowdfunding platforms.

Donation Crowdfunding:

  • When people donate money to a specific non-profit group (usually charitable) cause. JustGiving is a leading donation-based crowdfunding platform.

Before equity crowdfunding

Prior to the 2012 JOBS Act most entrepreneurs and companies raised capital via venture capital firms, Angel Investors or Private Placements, all with significant restrictions including who qualifies to invest, relegating the small investor and average person to the sidelines.

Equity crowdfunding has opened up investing in startups to everyone, not just the high net worth individuals and institutions. It gives everyday people the ability to discover and invest in exciting, early-stage, growth-focused companies alongside venture capital firms and other institutions, follow their journey, and financially benefit if those companies are successful.

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Equity crowdfunding is the sale of securities

The key difference between a crowdfunding site like Kickstarter and equity crowdfunding is what is being sold. With Kickstarter campaigns, entrepreneurs raise capital through the presale of their product, often at a discount, or through tiers of various perks to attract their fans and potential customers. Once the "investor" of a Kickstarter campaign receives their product or perk, the contract between the company and investor is over.

 

With equity crowdfunding, under Reg CF and Reg A companies sell securities, whether in the form of equity in the company, debt, revenue share, convertible note, and more. Equity crowdfunding gives investors skin in the game.

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A breakdown of the types of securities sold through equity crowdfunding

Source: Forbes, December 19, 2018

Investors in equity crowdfunding don't participate just to buy a product at a discount a year before its release; they stand to make a profit if they make a good investment and the company they invested in grows. This has benefits for the company as it can create hundreds of brand ambassadors who want to see you succeed, and that is an audience the company can depend on to spread the word about their business and share the product with their own networks.

Today's investors and backers worldwide

Now Under Reg CF and Reg A, nearly anyone can invest in startups through equity crowdfunding. Investors have to be at least 18 years old, however Prime Crowdfunding currently cannot not accept investment from Canadian and UK investors due to local securities laws in those countries. Otherwise, anyone in the US can invest in companies through Prime Crowdfunding.

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How much does a Prime Crowdfunding raise cost?

The total cost of launching a Regulation Crowdfunding campaign with us varies, but generally speaking, it costs approximately 8%-10% of the raise. This covers the campaign planning, marketing strategy, financial review, documentation and active campaign coaching required to launch a successful standard Regulation CF campaign.

Fundraisers pay a one-time campaign mgmt/coaching fee of $6,000 (includes portal fees and 60 hours of professional coaching)  and a total success fee of 6% (including all portal fee's) of the total amount raised. That’s it, no hidden on-going costs.

 

Included in the Management/Coaching fee: Prime Crowdfunding will create a one-minute campaign promotion video suitable for distribution on social media and on the campaign landing page. We will also invest a minimum of $1,500 (up to 1% of your fundraise) We believe this makes equity crowdfunding with Prime on the Silicon Prairie Exchange, the most comprehensive, and one of most competitive funding platforms available today!

Chart Originally Published by: Forbes Magazine

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* In the Reg CF example fundraise shown above, the 6% charged is a total of a 2% success fee paid to Prime Crowdfunding for campaign management, coaching and consulting services plus a 4% commission charged by the portal provider (in this case Silicon Prairie Portal and Exchange) as a fee for service. This total percentage may fluctuate between 6-7% based on the campaign type, specific fees associated and portal preference and is subject to applicable law.. 

** Depending on the type of crowdfunding offering that is best suited for your situation (Reg D, Reg CF or Reg A) you may incur legal and accounting fees for document preparation, compliance, and review. We can recommend trusted and experienced legal and finance professionals on request. 

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