A Beginner's Guide to Equity Crowdfunding

Selena Romero
September 29, 2021
6 minute read
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Crowdfunding is exactly what it sounds like: raising funds from a crowd. That could mean anyone from your friends and family to people across the country. If raising funds, it offers you a unique way to source money and simultaneously promotes your idea to the masses. If you give money to a crowdfunding campaign, you support the businesses and ideas that you believe in most and you become a part of a community.

Crowdfunding seems simple enough. But there are many questions about equity crowdfunding, which is a fairly new concept. This post will go more in-depth about equity crowdfunding and the perspectives of a potential investor and a business raising money. Keep reading to learn more about:

  • What equity crowdfunding is
  • Who can invest via equity crowdfunding
  • How to invest via equity crowdfunding
  • If equity crowdfunding is right for your business
  • Why you should raise money via equity crowdfunding

Before we begin, it’s important to understand the different types of crowdfunding.

Donation-based crowdfunding

In this type of crowdfunding, people give money to a cause expecting nothing in return. You've probably seen examples of donation-based crowdfunding on sites like GoFundMe, after accidents and natural disasters.

Rewards-based crowdfunding

Rewards-based crowdfunding gives you something, “a reward”, in return for your support. Typically used by up-and-coming businesses, you will often get a physical return for your monetary support. Sites that utilize this model of crowdfunding include Indiegogo and Kickstarter.

Equity crowdfunding

Regulated by various laws, equity crowdfunding is democratizing the private markets. Now, everyday investors can back companies from the very beginning. This type of investment was previously limited to people who met certain financial requirements, like accredited investors, and large funds, like venture capital. Equity crowdfunding allows the “crowd” to invest in a company, becoming a co-owner of the business in the process. To make equity crowdfunding possible, platforms must be secure and regulated, like FrontFundr.

For Investors

Who can invest in equity crowdfunding?

Crowdfunding allows anyone to give money to a cause. Whether it’s donation-based, rewards-based, or equity crowdfunding, the general public has access to participate.

In the case of equity crowdfunding, it opens the doors to invest in startups and growing business for everyday investors, while simultaneously generating more capital for entrepreneurs and businesses.

Previously, investing in the private markets (companies that are not “public” on the stock market) was limited to accredited investors (which have requirements like having a before-tax income of over $200,000 for at least two years in a row) or large funds, like venture capital.

To be fair, this made sense. As with any investment, investing in early-stage companies has its risks. These limits made sure that no one invested outside of his or her means.

However, with equity crowdfunding, everyday investors (also known as retail investors) can back the companies they believe in most in small amounts—as little as $100!

Additionally, there are regulations in place to ensure that everyday investors invest responsibly. With National Instrument 45-110, retail investors have a max of $2,500 they can invest per company, per 12-month period. Also, regulated platforms that host equity crowdfunding raised should be doing due diligence on each company they allow on their sites.

With these measures in place, it allows everyone to participate in equity crowdfunding while encouraging responsible investing.

Is equity crowdfunding the right investment for you?

Like any investment, it’s important to do your research before making a decision. With equity crowdfunding, you have many chances to learn more about the opportunities at hand.

When a company is raising funds through equity crowdfunding, it’ll have to do so through a secure online platform. Through there, you’ll likely see a company’s mission and goals, and what they plan to do with the funds.

Thanks to the handy internet, we encourage you to do your own research into the company as well. The great thing about equity crowdfunding is that you get to back the companies you believe in most from the start—make sure your investment is something you really stand behind.

Additionally, see if the company is holding online events or question periods (many do during an equity crowdfunding raise). That's your chance to speak directly with the company’s leaders to see if the investment opportunity aligns with your goals. Like being a dragon in Dragons' Den!

Note that like investing in the stock market, the private market also comes with risks. Due to its nature, you will not see a return on an equity crowdfunding investment unless the company gets acquired or files for an IPO.

However, each investment you make in the private markets is a nod of support for the companies you believe in most. Plus, each investment in the private markets allows you to become a part of a company’s journey and you join a community of investors that share the same mission.

For Raising Capital

Why raise capital via crowdfunding?

Crowdfunding may be an alternative source of financing, but its popularity continues to grow each year. We estimate an additional $2 billion can be unlocked for startup financing through equity crowdfunding.

While raising money is the biggest draw, the most notable difference between equity crowdfunding and other forms of raising capital, is the ability to build community and market your business at the same time.

By creating a campaign, your company’s mission is out for the world to see. In return, your investors can come from all over Canada, brought together because they believe in your company’s mission. In addition to being investors, they also become your biggest brand fans and advocates.

When tiptap raised $8.7 million it included retail investors through crowdfunding on FrontFundr. CEO Chris Greenfield, said the connections made through equity crowdfunding were an invaluable asset.

“People who have connected with us through FrontFundr have had discussions around further investments, helping us within the market, different market opportunities, networking, new business opportunities, growth potential,” he said. “Also, people with specific expertise have offered to help us because they like what we’re doing. The community is a big part of it. We’ve had some really good caliber connections.”

Raising capital through equity crowdfunding is about more than money, it’s about building a strong community of supporters for your business.

Is equity crowdfunding right for my business?

That depends. Equity crowdfunding is one of the numerous ways to finance a startup. There’s the traditional venture capital route, banks, and more recently, alternative capital from places like Clearco.

Each has its own advantages and disadvantages, but they all have the same goal: finance successful startups.

Equity crowdfunding, in particular, it’s a great way to open your capital raise to the general public. This allows you to get more eyes on your product or service and gain lifelong brand champions in the form of investors.

Trends in the U.S. and U.K. indicate that equity crowdfunding is something that more and more businesses are utilizing. We hope to see that trend continue here in Canada!

The best part is, equity crowdfunding doesn’t shut you off from the other forms of financing previously mentioned.

Like the tweet above implies, it’s very possible to open up your raise to retail investors while still being an attractive prospect to other financing options.

Take it from Mike Hibberd, Co-Founder of Willow. During his company’s $1 million raise, they tapped into the power of crowdfunding in addition to other forms of financing.

“The fact that we could prove we had shown our idea to a larger audience and they bought into our vision was a really powerful message to go back [to VCs] with,” he said.

All in all, equity crowdfunding is a great way to raise money while building community at the same time. However, it will take work to run a crowdfunding campaign, including creating marketing materials and sharing the raise with your network and the world.

So, think about what your company's goals are, then choose the financing method that works best for you.

Whether you’re looking to invest or looking to raise capital, make sure you do so with a registered, secure platform. As an exempt market dealer, FrontFundr is able to act as a safe and secure marketplace for equity crowdfunding.

If you’re looking to invest in exciting startups, click here. If you’re looking to raise capital via equity crowdfunding, click here.

Illustration by Elizaveta Guba from Ouch!

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Selena Romero