Crowdinvesting (a.k.a. Equity Crowdfunding) is the next revolution within the already disruptive crowdfunding trend. This type of investment is already a reality in UK and is about to become a lot more popular in the US, where the first platforms are already cropping up.
The concept of crowdinvesting is very similar to crowdfunding. You have a project and need to fund it, so you sign up to one of these crowdinvesting platforms where people can commit to back your project.
However, instead of just offering perks, gifts, your own finished product (if you are using crowdfunding as a sales channel) or downright asking for donations, you offer a share of your company’s profits.
Not so different from a stock market you say? There are some key differences:
- Investors do not necessarily have to get a share of your business, although that ends up happening in most cases. Backers may hold a document that gives them the right to dividends or a share of sales results, which may be transferrable or not depending on the platform and project, or may be entitled to equity shares of your startup company as soon as it gets officially launched.
- It’s aimed at small businesses and startups. Hence, high risk is involved and there may be 100% loss of the amount invested. That’s why legislation usually limits investments to small amounts for people who don’t earn enough to be qualified as accredited investors.
- As it’s aimed at small businesses and startups, there is no need for a shareholders’ board. All that’s required of the business, besides the usual regulatory filings, is the disclosure of its audited quarterly results to its investors.
- It’s usually an all or nothing investment system: if the company doesn’t raise the minimal amount to start the business, the money is given back to investors.
In the United States, some states are already passing regulations that allow individuals to invest in those businesses. Usually, a maximum investment of $2,000, for those who earn $100,000 or less, is the standard requirement. In the federal level, the JOBS Act (Jumpstart our Business Startups Act) is still pending some regulations to be in full effect, but the SEC is expected to issue such regulations before the end of 2015.
As a result, localized ventures are already appearing. One worth noting for small businesses is EquityEats, a crowdinvesting platform to fund restaurants and bakeries in Washington D.C. On it, investors receive perks at restaurants they invest in, but are also given preference in dividend distributions until they’ve recovered their full investments.
In the national level, we have the example of companies like WeFunder and Crowdfunder, which largely depend on the JOBS Act. They are already raising money for some technology related startup projects.
In the UK, Crowdcube has already raised more than £80 million (a little over $120 million) for 235 new businesses as of this writing. The projects range from food wrapper makers to botanical reference websites.