What is Equity Crowdfunding?
Let’s break this question up slightly, firstly lets define equity. Equity, from an investment perspective, is best described as ownership in an asset, be it a business, property or any other type of asset.
Many of us may be familiar with buying shares in our favourite companies. We would usually do this through a stockbroker who acts on our behalf and gives us share certificates in exchange for our investment. As the word suggests the shares represent a share in the company (this is known as the Equity).
To explain this further I'm going to introduce Pear Ltd an innovative technology company (as Apple was already taken). In total Pear issues 100 shares for a total of 50% equity in their company, and I want to buy 10 shares as I can see their hand held computer being the next BIG thing. If I buy these 10 shares I would own 5% of the company (asset) and therefore 5% of the equity.
Pear still has 90 shares available, but as I can only afford to buy 10 and Pear needs more investment in order to grow it would conventionally go to a bank or financial institution for assistance in exchange for equity or it would borrow money against its assets.
Crowdfunding platforms allow Pear to offer its equity to a wider investor pool. This in turn gives Pear Ltd access to money, and investors access to opportunities that would historically not have been available.
Crowdfunding has seen explosive growth following the 2007 'Credit Crunch'. As banks put a curb on lending and as businesses started suffering from a lack of cash, businesses were able to raise capital by selling equity or crowdfunding debt rather than going to conventional markets for money.
So, to summarise Equity Crowdfunding is the opportunity for investors to buy a share in something that might not have been possible historically. Interesting Right…..