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Equity crowdfunding explained: Opportunities, risks, and how to get started

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Pacaso
October 1, 2024
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Over the last 10 years, the investing world has seen many firsts, including several new types of opportunities for investors. One developing opportunity is equity crowdfunding, which offers the chance for everyday investors to own a piece of, and participate in the growth of, private companies. 
Until the mid 2010s, it was quite difficult for most people to access these types of opportunities. That changed with the 2012, Jumpstart Our Business Startups Act, known as the JOBS Act, which paved the way for investors to access private company investments. At that point, companies could start to leverage the JOBS Act and its innovative and community-building crowdfunding model to raise rounds of capital. This introduction to equity crowdfunding is most helpful for investors starting to explore the space and the opportunities it holds. 

How equity crowdfunding works

At a high level, companies can use certain crowdfunding regulations (like Regulation CF), adopted by the Securities and Exchange Commission (SEC), to offer shares to everyday investors. Companies using crowdfunding must work within the SEC’s guidelines, and comply with federal regulations. Unlike traditional investments offered by brokerage accounts (think Charles Schawb, Merrill Lynch, or Fidelity), equity crowdfunding opportunities often live on crowdfunding platforms or on the private company website directly. These platforms and self-hosted fundraises provide simple, accessible investment processes just like your typical brokerage. There are numerous equity crowdfunding platforms and some (like Wefunder) give you the chance to “get equity and front row seats to the startups and small businesses you love – for as little as $100.” Other platforms, like DealMaker, provide companies the tools to host a raise on their own company website. Whether you invest via a crowdfunding platform, or through the company directly, for just a small investment, you can get company equity and participate in its future growth. Crowdfunding appeals to companies because they can raise money from a broad range of people and continue to build their community. As an investor, you can diversify your portfolio and invest in private companies that may see great returns in the long run. Substack, for example, recently ran a crowdfunding round and raised over $7 million from nearly 7,000 investors. These investors were new and existing community members, and now they all can share in Substack’s potential success. DealMaker notes that “equity crowdfunding is a powerful way to turn customers into shareholders (and vice versa),” and that is exactly what Substack was able to do. With massive community support, Substack oversubscribed their investment round in just three weeks in April 2023. Other companies may look at this case study and realize they have the ability to raise from investors in the same way, so it is important to keep your eyes open for investment opportunities. 

Opportunities and benefits of equity crowdfunding

Because of its unique nature, equity crowdfunding offers a broad range of benefits to investors. It an opportunity to:

Get in on the ground floor

Equity crowdfunding gives investors the chance to invest in companies early, sometimes even before traditional venture capital or private investment. If the company is successful, investors could see very high returns. For example, the company Soliton raised $11 million of common stock in an equity round in 2019. They raised that $11 million at an $86 million valuation, and were acquired by Allergan Aesthetics in 2021 for $550 million, a valuation substantially higher than the initial equity round valuation. In that case, everyday investors paid $5 per share in 2019, and the ultimate exit was at $22.60 per share in 2021.

Diversify

Crowdfunding opportunities allow investors to broaden their investment portfolio, and diversify their investments. As an everyday investor, you are no longer limited to trading only traditional stocks and bonds. With just a small amount of capital, you can diversify your portfolio and invest in private companies through crowdfunding.

Support companies you love

Crowdfunding is a way for individuals to support businesses they love. For example, The Oakland Ballers, the new Oakland baseball team, recently launched a crowdfunding campaign. Yes, they are offering a chance to invest in them as a company in a traditional sense, but investment is also a vote of support and a way to become an actively engaged community member. With an investment of $170 or more in the Oakland Ballers, investors have the ability to vote in major company issues, and are invited to participate in the owners forum group. Companies may embrace crowdfunding in order to build their own investor and supporter community.

Enjoy perks

Investors may receive perks for investing in a crowdfunding round. For example, you may get early access to product releases, opportunities to meet key executives, company swag, and invitations to VIP events. Companies can benefit from investor feedback on their products or services, knowing that you have an incentive to provide an honest review to help the company grow in the long run. 

What are the risks of crowdfunding investing?

While there are many possible benefits of equity crowdfunding, there are some risks for investors: 

Lack of liquidity

One major risk of investing in a private company through crowdfunding is the possible lack of liquidity. This means that you may not be able to sell your shares until the company reaches an exit or Initial Public Offering (IPO). Your money may be tied up in the company for an unknown period of time, so you should only invest if you are comfortable with that possibility. For example, Uber completed its Series A round in 2011, but did not go public until 2019. Although it did not raise via crowdfunding, this example shows that even very successful companies may have lengthy time horizons for investors to see a return on their investment. Some companies may provide liquidity opportunities before an exit or IPO, but that is not guaranteed. It is important to check each specific investment opportunity to see if it provides liquidity. 

Startup risk 

Startups tend to be risky. With the potential for high reward also comes great risks. In an often-cited statistic, about 90% of startup companies fail. Research from Startup Genome has shown that only about 1.5% of startups produce a successful exit of $50 million or more across the top eight U.S. startup ecosystems.

Cost to the company 

From a company perspective, there is an added cost of compliance for the initial raise as well as ongoing obligations. These costs are not nearly as high as for a traditional IPO, but they may be more expensive than seeking a private raise led mainly by one or two institutional investors. This added cost can have a negative financial impact on the company if the raise does not earn them as much capital as they anticipated.When researching potential investments, you may see references to a “minimum raise amount,” which helps the company ensure it raises enough to cover all of its costs with a large amount designated for company growth once the raise is complete. Additionally, in some crowdfunding offerings, companies are responsible for keeping investors informed of their investment status on an ongoing basis. This is an extra cost for companies, but does provide good insight for investors. 

How to get started?

If all of this detail about equity crowdfunding excites you, your next step is to search online for equity crowdfunding opportunities just like you might research traditional stocks. There are many equity crowdfunding platforms — StartEngine, Wefunder, DealMaker, and Republic among them — that host numerous opportunities. Other platforms, such as DealMaker, help companies host the raise on their own websites. You will want to do some research to confirm you are comfortable investing on any of the sites. One key feature of these crowdfunding platforms is that businesses usually need to pitch the platforms themselves in order to partner with the platform. The platforms are incentivized to host successful raises because the platforms take a cut of the raise, so the platforms does its own background research and vets companies before launching a raise.You will find many different investment opportunities on each crowdfunding platform. Typically, companies will have their own investment websites, pages explaining the investment opportunity, and update posts showing offering progress. You will find all of the company’s offering documents on the platform or site. These offering documents usually include pitch decks, marketing materials, and any regulatory filings. For example, AptDeco’s raise featured a video, offering details, and questions and comments from investors. You also may find details of the company’s financials as well as a link to their official filing with the SEC. You can search the different crowdfunding sites to find businesses that interest you.After your research, making the actual investment is a seamless process. For example, let’s say you want to invest in AptDeco, which facilitates buying and selling of pre-owned furniture. Through your research, you found they are running a crowdfunding campaign. Simply create your account on their Wefunder investment page, plug in your information, and make the investment. Once the investment round is closed, you will receive your investment documentation and you have officially joined as an investor.Platforms like Kingscrowd provide investors with data on companies that are actively crowdfunding and offer additional background research. Kingscrowd is a platform that does not host raises itself, but analyzes investments across the top equity crowdfunding platforms and helps investors decide which crowdfunding investments are the most promising. 

The future of the industry

Online crowdfunding platforms and current regulatory frameworks make it easier and more efficient for investors to participate in equity crowdfunding. Equity crowdfunding opens a new route for companies to raise money, and the data backs up the dramatic increase over the last several years. Since 2020, companies have raised over $3 billion in Reg A+ and Reg CF. That is a tremendous amount of capital, and companies may be drawn to more of this type of offering. With average investments of just about $1,000 and minimums as low as $100, the future seems bright for investors looking to equity crowdfunding as their next investment strategy. 

Invest in Pacaso’s Reg A offering

Looking to diversify your portfolio and participate in a Reg A offering? Pacaso is giving investors the chance to invest in our company via Reg A. As a pioneer and leader of the co-ownership category in real estate, Pacaso has a successful track record backed by venture capital support and proven leaders, including former executives at Zillow, dotloop and Hotwire. With nearly $100 million in adjusted gross profit in just four years, Pacaso is tapping into a growing market and is poised to enter the next stage of growth. Learn more about the Pacaso Reg A opportunity here.
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