Equity crowdfunding is a form of crowdfunding. It’s a method through which an early stage business can raise money by selling shares to people (the “crowd”). The shares are equal to a small stake in the company – and so if it grows in value, the shareholders (crowd) will make a profit in their investment.
It’s a popular method for startups to raise money.
Is it like buying stocks?
It is similar in structure, but there are a few key differences to keep in mind:
- The company is usually much smaller, and still “private”, meaning that you can’t trade its shares on an open stock exchange
- You typically buy the shares through a website like Seedrs or Crowdcube
- Often the companies are young (i.e. early-stage businesses), so your investment can qualify for several tax reliefs like SEIS or EIS. You can claim these tax reliefs by filing a Self Assessment tax return
Who is allowed to invest?
Whilst at one point, equity crowdfunding was reserved only for seasoned investors, today the field is more open.
It generally takes place on an online equity investment platform. And you’ll likely have to prove that you have adequate investment experience, that you’re aware of the risks and, vitally, that you have the means to be involved!
What are the risks of equity crowdfunding?
As with all investments, you need to be aware of the risks. Equity crowdfunding comes with its own specific set:
- You probably won’t make dividends from your shares with such an early stage business
- There’s no guarantee of a profit
- Any return you see make take a long time to happen
- You won’t be able to easily sell on your shares until the company you invest in either exits or floats on an exchange – this is also known as illiquidity
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