Guest Post by Jenna Taylor – Content Marketing Executive at GrowthFunders
Equity crowdfunding is the process by which a large number of people (the “crowd”) invest varying amounts of capital into an unlisted company in exchange for shares in the company.
Traditionally, investing in unlisted startups and early stage businesses has been the reserve of high net worth individuals (accredited investors), but with the explosion in alternative finance solutions and the Internet, that’s all changed.
Now, suitably-qualified crowd investors can invest in businesses alongside more experienced, professional, and even institutional investors. This form of co-investment is rapidly gaining interest in the UK.
According to innovation charity, Nesta, around £84m was raised on equity crowdfunding platforms in 2014.
The Basics
Perhaps the simplest way to describe equity crowdfunding to those who aren’t familiar with the process is an online version of Dragons’ Den or Shark Tank where tens, hundreds, or thousands of people are able to become “dragons”, invest, and build (or add to) their investment portfolio.
Why use an Equity Investment Platform?
Equity crowdfunding platforms formalize the investment process, ensuring the rights of the investor are protected, and enable crowd – or new online angel – investors to invest into businesses with high growth potential from as little as £10.
By making an investment, you are purchasing shares in the startup or early stage business, thereby becoming a shareholder. The type of shareholding you receive is dependent on the platform you choose to invest through, as some offer “A” and “B” shares and others operate a nominee structure. Make sure you know what types of shares are being offered, prior to investing.
Equity crowdfunding is an activity regulated by the Financial Conduct Authority (FCA) which is responsible for enforcing guidelines that ensure such platforms are transparent, trustworthy, and operate within their permissions.
Reasons to Invest
Everyone has different reasons for wanting to invest in unlisted startups, including:
• Supporting a friend or family’s business venture
• Supporting the next generation of great British businesses
• Generating some returns
• Diversifying their investment portfolio
If done correctly, equity crowdfunding in the early stage investment marketplace is one of the best performing asset classes.
Rewards and Risks
However, as with any investment decision, some risks are involved. There are some steps you can take in order to mitigate the risks in equity crowdfunding, such as:
• Taking advantage of tax efficient investment schemes, like the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS)
• Investing as part of a bigger diversified investment portfolio
• Carrying out due diligence
Equity crowdfunding is quickly becoming the fastest-growing slice of alternative finance in the UK, growing by 410% between 2012 and 2014. With the net opening up these early stage investment opportunities to more interested parties, you could now possibly find yourself investing in the next Facebook.
Jenna Taylor provides investors and investee companies with valuable insights into the world of alternative finance as the Content Marketing Executive at GrowthFunders, an online equity crowdfunding and co-investment platform which provides investors with a simple, secure online process for investing in ambitious startups, early stage businesses, and more established private companies.
Enjoy this content? Be sure to Like it, hit those Share Buttons, and Subscribe below for more!
The post Guide for first time Investors: What is Equity Crowdfunding? appeared first on Crowds.io Blog.