The Advantages and Disadvantages of Equity Crowdfunding for a Business Startup

Crowdfunding is a great way to get funding for your business startup. There are major benefits that business owners can experience by utilizing the equity crowdfunding method to raise capital. Just like with anything, however, it does have its drawbacks. Read on to find out the pros and cons of equity crowdfunding for a business startup.

The Advantages of Equity Crowdfunding

One of the major benefits of equity crowdfunding to raise capital is it enables entrepreneurs get funding for the startup when they cannot obtain financing anywhere else. Another benefit is that it does not require entrepreneurs to give up much equity in their company, meaning they can retain a large portion of their ownership. People that want to invest in a company through equity crowdfunding campaigns can benefit by not having to be sophisticated investors to be able to invest.

Not only do the business and the investors get benefits from this method of raising capital, but it also helps stimulate the U.S economy as a whole. Equity crowdfunding gives aspiring business owners and entrepreneurs who lack personal savings and access to other funding options the chance to create a new business and stimulate the economy.

The Cons of Equity Crowdfunding

Although there are numerous benefits that are experienced through using equity crowdfunding as a method to raise capital, there are some disadvantages as well.

Popular crowdfunding sites such as Kickstarter and GoFund me are subject to getting hacked which can cause harm and losses for the crowdfunding investors. This means that the crowdfunding investors may be unable to sell their shares in a company unless they sell them at a huge discount. Due to this problem, it can make equity crowdfunding a less attractive option to get funding for their startup companies.

There are critics concerned with the Securities and Exchange Commission’s ability to police fraudulent securities offerings made by smaller companies that take the crowdfunding route. Investing in business startups through equity crowdfunding is not limited to accredited investors, less sophisticated investors can be taken advantage of due to the lack of knowledge regarding investing.

Investors that are less sophisticated do not request financial reports that reveal significant information about a company like accredited investors do. For this reason, they are subject to fraud and major financial losses. The Securities and Exchange Commission requires that the companies who use equity crowdfunding follow the financial reporting rules to product and minimize the financial losses of the less accredited investors.

The Bottom Line

An entrepreneur should understand the different types of crowdfunding to determine whether it is the best way to get capital. This type of funding works well for business starts that offer an innovative and realistic product or service that wants to grow fast and can handle growth. It works well for those who do not mind giving up ownership in the company.

Effective marketing and advertising is a crucial component of a successful equity crowdfunding campaign. Most entrepreneurs are concerned about hiring an accountant due to the high costs. New business owners may not know how to have a successful equity crowdfunding campaign.

Equity crowdfunding is a great alternative to get funding than the traditional route. It is proven to be effective for many new startup companies. However, remember to consider the costs, the pros, the cons, and the federal regulation associated with it.