Equity crowdfunding has been somewhat burdened by its name. Crowdfunding is typically associated with pre-ordering a product to get to market or receiving charity and donations, while equity crowdfunding is nothing of the sort. This has left a lot of investors, journalists, and spectators confused over the years. It's also a driving force behind the current transition of calling investment rounds raised through equity crowdfunding "Community Rounds" instead of other crowdfunding-based terminology.
What Is Equity Crowdfunding?
Equity Crowdfunding is a method of raising investment funds by selling shares or other securities in ones company online in which generally smaller investments are given by a large number of investors. This was legalized by the JOBS Act, which reduced the barriers to entry for investing in startups. For a deep dive into the industry, check out the article below:
Equity crowdfunding comes in two parts. The first is allowing small businesses to offer securities such as shares to the general public. Companies typically do this to raise investment funds, help gain lifelong customers and a host of other benefits. Startups are giving up shares or other securities in their company in exchange for cash.
The other side is allowing anyone to invest in startups. These raises are typically marketed online to the general public. Startups often market to their readers, customers, supporters, followers and stakeholders first. If they raise the desired funding goal then the startup simply ends the raise. But if not, they can pay for social media ads to help reach their funding goal.
But at its most basic level, investors are trading their money for an equity stake in a startup with the goal of receiving a financial return.
What is Normal Crowdfunding?
Traditional crowdfunding is significantly different. Traditional crowdfunding comes in many different forms but there is never any stock or investing aspect. There are companies like IndieGoGo and Kickstarter, which are more product focused. On these sites, startups are typically raising funds to pre-sell products to help bring them to market. For example, a company might launch a Kickstarter campaign to bring their book or new invention to market. Backers get a discounted version of the product.
There is also crowdfunding for charities and other causes. For example, GoFundMe typically revolves around people helping pay for college, medical bills, protests or other charities or causes.
How Are Equity Crowdfunding And Normal Crowdfunding Different?
The main difference between normal crowdfunding and equity crowdfunding is the lack of an expected financial return. While backers in a normal crowdfunding campaign might expect something in return, like a product, that will never be something with a financial return or interest tied to it. Conversely, equity crowdfunding will always have some sort of financial return or investment aspect to it.