Equity Crowdfunding is a crowdfunding rose of a different color, and while it shares many elements of donation or reward crowdfunding, its nature as a capital investment means it comes under securities laws in the country of origin. Equity crowdfunding means an investment through a crowdfunding platform, usually for a startup or early business, in exchange for a piece of the business. It is hoped by both the investor and the business owner that the value of the business, and the value of the equity investment, will grow over time.
The popularity of crowdfunding of all types has put the pressure on governments to try and regulate the practice, especially equity crowdfunding. Capital investment has in the past been made with large sums of money by big corporations. Securities and investment law has been set into place regulating what should be done on both sides of the investment equation. There have been laws about who can solicit investments, how much, how much an investor has to have in order to invest, and similar. All of these laws are designed to protect both parties.
But equity crowdfunding is different in that it allows, and is usually comprised of, the small investor with little to give and little to lose. The regulatory burden is significant, and involves financial statements, prospectus, and other documentary evidence suggesting the business is sound. This degree of regulatory requirement is not reasonable for the startup business. So the new crowdfunding platforms that are offering equity crowdfunding are a new option for small investors who were previously not allowed into the market, and startups who had to find other ways to raise capital. These types of business investment also come with significant risk for capital loss.
New regulations that specifically detail how equity crowdfunding will or will not be exempt from in-place capital investment laws and other financial regulations regarding securities exchange and sale are being developed and written by individual countries. The US, China, and Canada have all written securities laws that exempt equity crowdfunding from many of the specific regulations that are more pertinent to large investors. These laws do, however, require more regulatory oversight of the practice than donation crowdfunding.
Individual countries in Europe are writing their own securities laws specific to equity crowdfunding, and most EU countries have active equity crowdfunding platforms. For more information on donation or reward versus equity crowdfunding, please contact us.
The post Selling a Piece of the Pie: Equity Crowdfunding Basics appeared first on STRATECTA.