Equity Crowdfunding for Small Businesses

Small Business Deal Structure

How does Equity Crowdfunding work?

Investment crowdfunding, also known as equity based crowdfunding, is the process of getting a “crowd” of people to invest in a project or business. Investment crowdfunding is where businesses seeking capital can sell ownership stake in the company. For example, a business may require $50,000 to pay for a new project or expansion. Investment crowdfunding can help the business owner raise funds for the project. This is accomplished using a crowdfunding platform. To raise funds, the business owner needs to set an amount, deadline and describe the business and project. If the total amount is not raised before the deadline, the funds may be are returned to the investors.

Unlike the donation model, with investment crowdfunding, people who invest in a company become shareholders in the company. Currently, crowdfunding comes with limits in the US. The law permits investment up to 5% for individuals earning less than $100,000 and 10% for individuals earning earnings more than $100,000. If Americans invested 1% of the money they hold in small businesses and startups, the investment would amount to $300 billion. Overtime, the equity crowdfunding market will be significantly larger than the venture capital market. Equity crowdfunding is also very interesting to angel investors as it opens up several new sources for deal flow, especially if the deals are curated and well presented.

In the context of existing small businesses, a business owner may raise funds in exchange for equity, which is an efficient and quick way to raise investment for growth or other projects. Typically, the “crowd” that invests will be investors who are interested in the business area or subject matter experts. Additionally, the business owner can also raise funds as a debt offering. In this case the crowd will donate or invest in a business or project in exchange for a financial return and / or interest at a future date. Business owners must be mindful of the fees associated with raising money on crowdfunding sites as these fees can range from 3% to 10%. The fees tend to be higher if the funding goal is not met and if the campaign is setup as flexible. Equity crowdfunding promises to provide small businesses an efficient platform to access thousands of potential investors.However, the key element to a crowdfunding campaign is marketing the campaign. It is important to start planning and create a fan base and interested customers much before the actual campaign starts.

What makes Equity Crowdfunding possible in the US and Canada?

In USA, the Jumpstart Our Business Startups Act or JOBS Act was passed in April 2012 with support from both parties. The law allows small businesses and startups in the US to raise funds using crowdfunfung. In effect the law allows non-accredited investors to invest in startups and small businesses for an equity stake in the venture thereby allowing small companies to go public earlier than ever before. Raising money by selling equity in the company will allow businesses to scale much faster. The JOBS act has been passed by congress and the SEC is now developing the rules and regulations for equity crowd funding.

In Canada the securities commissions in Ontario, British Columbia and other provinces are working on developing rules and regulations for investment crowdfunding.

About BuySellBusinesses.com

BuySellBusinesses.com facilitates equity crowd funding by aggregating deals from our partners and helping connect business investors with startups looking for funding. The site partners with established equity crowd funding platforms.

BuySellBusinesses.com facilitates small business mergers and acquisitions by assisting business owners and business brokers sell the entire business or sell equity in a business. Equity Crowdfunding is the future of funding for small businesses. It is the next evolution of raising capital and does a better job of balancing investor protection with efficient and fair capital markets.

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