Equity crowdfunding

Equity crowdfunding can help your business raise funding from a number of investors, in a regulated way. You list on an online platform that allows investors and members of the public to buy shares in your business.

An equity crowdfunding platform will assess your business, and the associated documentation you provide, to make sure it complies with its requirements. Some platforms will also help you choose the timeframe or amount of investment you ask for.

Every crowdfunding platform is different. Some will manage your communication with shareholders, while others offer business advice. You should always speak to the platform about its services and specialties before you commit to listing.

Regulations and tax incentives

Financial Conduct Authority (FCA)

In the UK, the FCALink opens in a new window regulates all equity crowdfunding platforms. It also enforces the Prospectus RulesLink opens in a new window, which state that if a crowdfunding raise goes beyond €5m, the company will need to produce a prospectus for the FCA to approve.

Enterprise Investment Scheme and Seed Enterprise Investment Scheme

For crowdfunding projects, the Enterprise Investment Scheme (EIS)Link opens in a new window and the Seed Enterprise Investment Scheme (SEIS)Link opens in a new window offer tax relief incentives to investors. Businesses can raise up to £150,000 under SEIS and up to £5m under EIS.

While equity crowdfunding offers investors a small share of your business in return for money, peer-to-peer (P2P) lenders loan money to your business in return for a fixed return over a fixed period.

People often confuse the two, but there are important differences. Each has different benefits and suit companies at different stages of their growth. You should consult a qualified financial adviser if you are unsure about the options available to you.

Access to capital

Opens up the world of finance for businesses that 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 must operate according to regulations, which makes them a controlled environment in which 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.

Complement other forms of funding

There’s nothing to stop you using equity crowdfunding alongside other types of finance.

Fees

Some equity crowdfunding platforms charge you to list your business with them.

No guarantee of success

Unfortunately, there’s a chance your raise won’t have the result you're hoping for. Added to that, any failure will be in the public eye.

Due diligence and your credit report

Crowdfunding platforms will conduct due diligence. Depending on the type of checks a platform carries out, this may affect both your personal and your business credit reports.

About your business

• Business stage:  Pre-revenue through to more established businesses
• Annual turnover:  Less than £5m
• Sectors:  All
• Regions:  All

About the finance

• 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: Depends on the type of business
• Cost of finance:  Depends on the platform. Some charge a success fee (usually a percentage of the amount raised) with a listing fee. Others charge a percentage of profit
• Time to finance: Once your documents are in order, it can take as little as a month

Ask an expert: Bruce Davis, founding director at UK Crowdfunding Association (UKCFA)

There are lots of myths surrounding equity crowdfunding, but they are often unfounded. Here are some of them – and an explanation for why businesses should reconsider what they think they know.

Myth 1: Crowdfunding is too risky

Businesses worry about the risk of damage to their reputation. But crowdfunding platforms are responsible for conducting due diligence and complying with financial regulations, 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, with each platform, see what kind of businesses have raised funds with them 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 types of equity finance, such as angel investment and venture capital.

Myth 4: It’s easy money

The crowd isn’t necessarily easier to secure money from than an investment fund, for example. The complexities of the due diligence process mean that they involve similar commitments of cost and time.

An open forum

If your business fails to raise money, it does so in firm view of the public.

Due diligence

There are lots of checks. Crowdfunding platforms will expect you to have your company financial information and Companies House filings in good order, and will do background research on members of your team.

Managing investors

You'll have to answer questions from potential investors, as well as managing their expectations once they've invested.

Fees

Platforms often charge a success fee (usually a percentage of the amount raised) with a listing fee. Others will take a percentage of your profits.

The UK Crowdfunding Association's list of membersLink opens in a new window is a good place to start.

You must spend time looking for the right platform for your business. And be aware that the journey involves lots of due diligence and hard work, so you need to be prepared!