Businesses list on a Financial Conduct Authority (FCA) authorised online platform which allows members of the public to buy shares in the business.
“Crowdfunding gives businesses the opportunity to tap into the right Crowd. These are people who believe in your business and who are willing to put their money behind it.”
Atuksha Poonwassie Co-Founder @ Simple Crowdfunding
Crowdfunding platforms raised £217.7m across 360 deals for UK businesses in 2017
Beauhurst, The Deal: Equity investment in the UK 2017
Key requirement
You must be willing to share information about your business publically
Key benefit
You can access funding from multiple investors in a regulated environment
Key consideration
You will need to create clear, concise and accurate documentation to present to the crowd
What is Equity Crowdfunding?
Equity Crowdfunding can help businesses raise funding from multiple investors in a regulated way. Businesses list on an online platform, where investors and members of the general public can buy shares in the business.
Equity Crowdfunding platforms will assess your business and associated documentation to make sure it complies with its requirements. Some platforms will also help you choose the timeframe or investment amount you ask for.
Every Crowdfunding platform is different. Some platforms will manage your shareholder communication, whilst others offer advice. Businesses should speak to the platform about their services and specialties before they commit to listing.
What are Equity Crowdfunding regulations and tax incentives?
- The FCAThe Financial Conduct Authority (FCA) regulates all Equity Crowdfunding platforms in the UK. The FCA also enforces the Prospectus Rules, where if a raise goes beyond €5m, the company will need to produce a prospectus which will need to be approved by the FCA.
- SEIS and EISFor crowdfunding projects, the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are available, offering tax relief incentives to investors. Businesses can raise up to £150k under SEIS and up to £5m under EIS.
What’s the difference between Equity Crowdfunding and Peer-to-Peer Lending?
Whilst Equity Crowdfunding offers investors a small share of your business in return for money, Peer-to-Peer Lenders loan money to your business in return for a fixed return over a fixed period.
The two often get confused but there are important differences. Each has different benefits and suit companies at different stages of their growth and lifecycle. You should consult a qualified financial adviser if you are unsure about the options available to you.
“Equity Crowdfunding is a regulated way to raise finance and get long-term investors into your business.”
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Bruce Davis Founding Director @ UKCFA |
What are the benefits of Equity Crowdfunding?
Access to capital
Opens up the world of finance for businesses who may have been rejected before.
Engaged investors
Ordinary people choose to invest their own money in your business.
Minority shares
You can give away as much or as little of your business as you like, meaning you can stay in control.
Regulated environment
Platforms provide a regulated environment where investors and businesses can connect.
Help and advice
Depending on which platform you choose, you can get help and support at various stages in the process.
Complementary
You can use Equity Crowdfunding alongside other kinds of funding – it doesn’t stop you accessing other types of finance.
What are the risks of Equity Crowdfunding?
Fees
There may be a fee to list your business, depending on the platform.
Unsuccessful raises
There is no guarantee your raise will be successful. Any failure will be in the public eye.
Due diligence and your credit report
Crowdfunding platforms will conduct due diligence. Depending on the platform and the checks it carries out, the checks may affect your personal and business credit report.
Is Equity Crowdfunding right for you?
About your business | ||
| Business stage | Pre-revenue through to more established businesses | |
| Annual turnover | Any | |
| Sectors | Any | |
| Regions | Any | |
About Equity Crowdfunding | ||
| Purpose of finance | Creating new products, acquisition finance, product development, project fulfilment, entry into new markets | |
| Amount of finance | Up to £4.3m without a prospectus, higher with a prospectus | |
| Duration of finance | Dependent on the business being funded | |
| Cost of finance | This is platform specific. Platforms often charge a success fee (usually a percentage of the amount raised) with a listing fee. Others will charge a percentage of profit | |
| Time to finance | Once your documents are in order, it can take as little as a month | |
Mythbusting Equity Crowdfunding Bruce Davis, Founding Director @ UKCFA
There are lots of myths surrounding Equity Crowdfunding, but they are often unfounded. Here are some of the myths – and an explanation for why businesses should reconsider what they think they know.
- Myth 1: It’s too risky Businesses worry about reputational risk. But Crowdfunding platforms are responsible for due diligence and financial promotion compliance, to keep businesses on the right side of the law.
- Myth 2: It’s only for high-profile businesses Some people may look to invest in very consumer-focused businesses, but the Crowd is often as diverse as businesses are themselves. You just need to find the platform that’s the best fit for your business. Do your research and look at platforms to see what kind of businesses have raised funds in the past.
- Myth 3: It’s just an extension of your marketing Equity Crowdfunding is more than just a way to sell your product. It’s actually a regulated investment world that operates like other investments, such as Angel Investing and Venture Capital.
- Myth 4: It’s easy money The Crowd is not necessarily easier to secure money from than an investment fund, for example. The complexities of the due diligence process mean that they involve similar cost and time commitments.
Equity Crowdfuding Considerations
- Public and open forum Any failure you have is firmly in view of the public
- Due diligence There’s lots of due diligence to do – Crowdfunding platforms will expect you to have your company financial information and Companies House filings in good order, as well as doing background checks on members of your team
- Managing investors You will have to answer questions from potential investors, as well as managing their expectations once they have invested
- Charges Platforms often charge a success fee (usually a percentage of the amount raised) with a listing fee. Others will charge a percentage of profit
How do you apply for Equity Crowdfunding?
- Business owners need to spend time looking for the right platform for them
- The journey involves lots of due diligence and hard work, so owners need to be prepared
“Platforms will ask questions about why you’re raising money and what you want to achieve. You need to spend time planning your answers out at the start of the process.”
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Bruce Davis Founding Director @ UKCFA |
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