Equity Crowdinvesting is a crowdfunding rose of a different color, and while it shares many elements of donation or reward crowdfunding, its nature as a capital investment means it comes under securities laws in the country of origin. In essence, crowdinvesting is equity-based crowdfunding. With crowdinvesting the investor moves beyond simply supporting start-ups, and becomes an active player in the future of that project. Equity crowdfunding means an investment through a crowdfunding platform, usually for a startup or early business, in exchange for a piece of the business. It is hoped by both the investor and the business owner that the value of the business, and the value of the equity investment, will grow over time.
The popularity of crowdfunding of all types has put the pressure on governments to try and regulate the practice, especially equity crowdfunding. Capital investment has in the past been made with large sums of money by big corporations. Securities and investment law has been set into place regulating what should be done on both sides of the investment equation. There have been laws about who can solicit investments, how much, how much an investor has to have in order to invest, and similar. All of these laws are designed to protect both parties.
But equity crowdinvesting is different in that it allows, and is usually comprised of, the small investor with little to give and little to lose. The regulatory burden is significant, and involves financial statements, prospectus, and other documentary evidence suggesting the business is sound. This degree of regulatory requirement is in general not reasonable for the startup business – but there are certain reliefs in some european countries. So the new crowdfunding platforms that are offering equity crowdfunding are a new option for small investors who were previously not allowed into the market, and startups who had to find other ways to raise capital. These types of business investment also come with significant risk for capital loss. Continue reading