We recently discussed how to get started with angel investing (i.e., investing in early-stage startups). However, many people don’t meet the SEC requirements to be an accredited investor, which is a prerequisite to becoming an angel investor.
If you’re not an accredited investor but you’re still interested in startup investing, crowdfunding can be a great alternative.
You may have heard about crowdfunding for charity or other causes (e.g., GoFundMe), but today we’re going to discuss equity crowdfunding for businesses and startups.
SO, WHAT IS EQUITY CROWDFUNDING?
Equity crowdfunding is a way for startups to raise seed or early-stage funding through a large number of individuals, who often invest small amounts each, instead of getting funding through more traditional sources, such as angel groups or venture capitalists.
Companies post about their business ideas on online platforms for users/investors to see, often called “campaigns”. If users are interested, they can invest in the company in exchange for equity in the business.
BENEFITS OF EQUITY CROWDFUNDING
THERE’S SEVERAL BENEFITS TO RAISING FUNDS THROUGH EQUITY CROWDFUNDING INSTEAD OF TRADITIONAL CAPITAL RAISES, BOTH FOR ENTREPRENEURS AND INVESTORS:
Firstly, women founders often find more success through equity crowdfunding. As we often discuss here at Glass Half Funded, women founding teams receive less than 3% of venture capital funding. However, women receive 22% of equity crowdfunding dollars.
Another benefit of crowdfunding is that investors don’t have to be accredited to invest through crowdfunding. With only 22% of angel investors being women, equity crowdfunding has more potential to get diverse investors.
Crowdfunding also has more reach than a typical capital raise. By putting a business idea out there for a large audience to see, founders can also gauge potential interest from the market. Again, this can be great for women and other underrepresented founders. Since most venture capitalists are white men, it can be harder for women to convince VCs that they have a great idea. Through crowdfunding, the market can decide whether the business is a good idea.
Lastly, crowdfunding can be a much more simple process than a traditional venture capital raise. Oftentimes, founders have to “know someone” to get a meeting with a venture capitalist. Using an online crowdfunding platform is more accessible for most founders, who might not have a strong network in Silicon Valley.
EVEN THOUGH EQUITY CROWDFUNDING DOESN’T REQUIRE ACCREDITED INVESTOR STATUS, THE SEC STILL HAS A FEW RULES TO KEEP IN MIND:
For individual investors, the SEC sets rules that limit the amount of investment that can be made through crowdfunding in a 12-month period. For example, if your annual income or net worth are below $107,000, you can invest the greater of $2,200 or 5% of your annual income or net worth (use the lesser of your annual income and net worth for the 5% determination). You can find more detail on the rules for investors here.
For companies looking to raise money, the SEC set rules that limit both the amount of investment allowed and the number of non-accredited investors allowed. Within a 12-month period, companies cannot raise more than $5 million through crowdfunding. This is a recent increase from the previous $1M limit. You can read more about the rule changes here.
IF YOU WANT TO GET STARTED WITH EQUITY CROWDFUNDING, HERE ARE TWO PLATFORMS I RECOMMEND:
IFundWomen is a platform that offers online fundraising, small business grants, business coaching, and networking. As the name suggests, the company is focused on supporting women and other underrepresented founders.
Republic is another popular crowdfunding platform. Backstage Capital raised $5M on the Republic platform earlier this year (and I was so excited to participate)!
Raising capital to get a business off the ground is incredibly difficult. It’s even more difficult for women and minority founders. Crowdfunding is a creative way to get funding and it’s also great for people who want to invest in startups but aren’t accredited yet!