Equity crowdfunding is the online offering of private company securities to a broad group of investors who receive an ownership stake in the business rather than a product or a reward. It is also called crowd-investing, investment crowdfunding, or crowd equity.
The distinction that matters is what the money buys. On reward-based platforms such as 📝Kickstarter, backers pre-order a product or receive a perk; in equity crowdfunding they buy shares, which makes the transaction a securities sale and places it under securities and financial regulation. Platforms are correspondingly licensed rather than open — in the United States, offerings run through SEC-registered funding portals or broker-dealers such as 📝Seed Invest, and in the United Kingdom through firms authorized by the Financial Conduct Authority.
The United States framework came from the 📝JOBS Act, signed April 5, 2012. Its Title III created Regulation Crowdfunding, which took effect May 16, 2016 and allowed non-accredited investors to buy into private offerings for the first time. Issuers were initially capped at roughly $1 million raised per twelve-month period; the SEC raised that ceiling to $5 million effective March 15, 2021. Individual investors remain subject to annual investment limits scaled to their income and net worth.
The upside and downside both follow the company: a share gains value if the business does and loses it if the business does not. Private shares are illiquid, with no ready secondary market, so a return generally depends on an acquisition or a public offering. What retail investors typically receive is 📝Common Shares, which sit behind the 📝Preferred Shares held by institutional investors in a 📝liquidity event. Coverage of the category indicates its potential is greatest for early-stage companies raising smaller amounts, with follow-on growth capital coming from 📝angel investors and venture funds.