Equity crowdfunding is a part of the capital market. It refers to the online offering of the securities of a private company to several people with the purpose of investment. Most of the time, it is regulated by securities and financial laws. It is also called crowd equity, crowd-investing or investment crowd funding. Today we are going to have a look at the pros and cons of this type of investment and see if it’s worth it.
Equity Crowdfunding – Pros and Cons
1. It Helps Business Startups
This is a great way for entrepreneurs to get money for their startups. In some cases, they simply can’t get financing elsewhere and thus, this becomes their only means. Moreover, it can develop quite fast, so entrepreneurs can obtain profit sooner than they thought. There are even some crowdfunding for non-profits options out there.
2. You Don’t Need to Give Up A Large Amount of Equity
Another reason for which people prefer equity crowdfunding is the fact that they don’t need to concede a big share of equity. As such, they can have significant ownership. This is particularly important since nobody wants to lose their barely-started business little by little.
3. You Don’t Need Sophisticated Investors
This is an advantage that benefits the donors as well. As someone who wants to support an idea they believe in, it’s extremely easy to do so and give money. What’s more, entrepreneurs don’t need to run around for sophisticated investors, which saves them a lot of time they could spend improving their product or business.
4. It Helps the Economy
By relying on a simple process, equity crowdfunding encourages people to start up their own businesses. Various polls have shown that in the last years, there have been less and less new companies. Since it’s so easy to gather money with this strategy, more people might get into the business, thus helping the economy.
1. Online Platforms Can Be Hacked
This is one of the main drawbacks of equity crowdfunding. There are various intermediary platforms, such as GoFundMe, Kickstarter or Indiegogo. If a hacker happens to take control over these, not only they gain access to the data, but they also cause entrepreneurs to lose potential investments.
2. Shares Can’t Be Sold for Their Value
In case something like the above example happens, the crowdfunding investors can’t sell their shares in a company at their value. They will have to offer people a huge discount, since there is no secondary market for this type of securities, usually. Consequently, this investment option can be less attractive.
3. Detecting Fraud
Another reason for concern for people who want to invest in the startups they find on the platforms is fraud. Critics claim that the Securities and Exchange Commission can’t police all the offerings on the platforms. Most of the time, they can’t catch such fraud before people sell the securities.
All in all, there are plenty of good and bad things going on with equity crowdfunding. Some people prefer it because it offers easy access to funds, but there are also some security issues that worry them. In the end, it’s your call if it’s worth all the risks you will have to take, either as an entrepreneur or as an investor.
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