Equity crowd funding websites connect investors with businesses looking to raise funds. The best platforms charge low fees to investors and protect deposits with independent schemes. Compare platforms to find businesses to invest in online.
What is equity crowdfunding?
Equity crowdfunding is a way for early-stage companies to raise money from individuals, commonly known as angel investors. Investing in startup companies is a high return, high-risk strategy and quite often enables these early-stage investors to have some input in the way the company is run. As investors are investing at such an early stage a large percentage of a company is often available for purchase.
Unlike debt crowdfunding, you own a part of the company and share in any profits that are generated. A drawback, of course, is that unlike buying shares on the stock market where it is possible to sell quickly, finding a buyer if you want out may be tricky.
Major equity crowdfunding sites in the UK:
Regulation of the equity crowdfunding industry
Until recently, equity crowdfunding in the UK was not regulated, but the FCA has recently made it illegal to operate an equity crowdfunding platform without the required regulatory status. You can check whether an equity crowdfunding platform is regulated by checking the FCA Register.
Never hand any money over to an investment firm that is not regulated by the FCA.
Even then it is important to do your own research. The FCA publishes crowdfunding information and warnings about firms that scam their customers and the Money Advice Service offers information on P2P lending.
Crowdfunding is an execution only high-risk investment product – if you are ever cold called or pressured into investing contact the FCA and report it immediately as they are either not regulated or behaving inappropriately. To see the latest companies in the UK raising funds via crowdfunding see our aggregated crowdfunding pitches feed.
Many have suggested that regulation is a bad thing and will damage the industry but this could not be further from the truth. Regulation is an essential part of ensuring that investors get the facts about what they are investing in and that equity crowdfunding marketing is balanced and fair. Regulation also helps ensure that the risks, as well as the rewards, are highlighted in promotional material and advertising.
The rewards versus the risk of crowdfunding
There is absolutely no doubt that equity crowdfunding is a high-risk investment strategy. It is also clear that most of these investments will lose money and investors will not see a return. It is true that around 80% of businesses do not make it past the first three years. However, this is not necessarily due to a bad business model or a flawed management team. It can be due to the simple fact that a business cannot fund it’s expansion or not afford to advertise it’s services sufficiently.
The rewards, of course, can be immense, imagine being able to have been an original investor in Facebook or Google. All these companies started on a small scale and grew due to investors having faith in the management team and the product. The rewards are high but so are the risks so with all investments it is imperative to diversify, not commit more than you can afford to lose and always seek independent financial advice before committing.
In a nutshell, there are really two potential outcomes…
- You will lose all your money
- You will make lots of money
To see companies that are currently looking for investors through equity crowdfunding see our aggregated equity crowdfunding section.
Fees involved in equity crowdfunding
- 7.5% on any profit made (i.e. in excess of the capital invested) on investments held by Seedrs as nominee
- Life-time management fees of between 12.5% and 24.3% plus an initial fee of up-to 2.33% plus a performance fee of between 10% and 20%.
- A fee of 1.5% of the amount invested is charged on top of the amount you invest.
It is important to compare the platform charges of crowdfunding sites before going ahead. It is easy to think of this as a sunk cost but in reality crowdfunding sites charge fees and commission which is how they generate income. Equity crowdfunding sites usually charge an admin fee, plus a commission on successful fundraising. So, this can mean that if your pitch is not successful you pay nothing, but if it is then you could end up giving back as much as 7.%. They will also levy an administration charge, come will also charge entrepreneurs the processing costs for taking investor funds, this can be as high as 0.5%. Other’s will apply this charge to the investor but give the option to deposit funds via bank transfer to avoid it.
Whilst the fees may seem fair on the basis that these platforms are raising money for you be careful. Just because they say they have 100,000 people ready to invest this doesn’t mean they actually will. It is common knowledge that successful pitches get the first 30%-70% (or even all of it) from friends, family and the founders own network. Then it is sheep mentality for the rest. However, entrepreneurs, after raising 30% of their target could probably save themselves the commission by a few well-placed calls to start up capitalists.
Can you meet the company’s management?
The majority of crowdfunding platforms are online, but also offer meet and greet sessions for potential investors to meet a company’s management. The online pitches are very thorough and often include videos, Q&A forums and full business plans and financial forecasts on request.
Progression from Angel Investment Networks
Equity crowdfunding is really the natural progression from Angel Investment Networks who would traditional post pitching session in conference rooms. They would allow their members to hear the essentials of a company’s business plan and then afterward speak directly with the management before making an investment.