Private Equity Crowdfunding: A Comprehensive Guide for Investors

Private equity crowdfunding refers to the practice of generating funding through the sale of securities such as shares, debts, and convertible notes. It is a new and increasingly popular way for entrepreneursEntrepreneurAn entrepreneur is a person who starts, designs, launches, and runs a new business. Instead of being an employee and reporting to a supervisor, early-stage companies, or small businesses to obtain funding. In private equity crowdfunding, the investor secures equity interest or partial ownership in the business.

Summary: 

• Private equity crowdfunding refers to the practice of generating funding through the sale of securities such as shares, debts, and convertible notes.
• Private equity crowdfunding is similar to campaigns done through applications such as Kickstarter in that all funding is raised through online platforms.
• There are a number of private equity crowdfunding platforms on the market; SeedInvest, Localstake, and StartEngine are three of the most widely used platforms.

How Does Private Equity Crowdfunding Work?

Private equity crowdfunding – typically referred to simply as equity crowdfunding – is the process of raising capital from investors by selling securities such as:

• Convertible notes
• Revenue shares
• DebtSenior and Subordinated DebtIn order to understand senior and subordinated debt, we must first review the capital stack. Capital stack ranks the priority of different sources of financing. Senior and subordinated debt refer to their rank in a company's capital stack.  In the event of a liquidation, senior debt is paid out first

The securities must come from a private company – one that isn’t on any stock exchangesNew York Stock Exchange (NYSE)The New York Stock Exchange (NYSE) is the largest securities exchange in the world, hosting 82% of the S&P 500, as well as 70 of the biggest – in order to be considered private equity crowdfunding.

Initially, private equity funding was reserved for only qualified investors. Qualified investors were individuals with significant amounts of capital; they were required to invest large amounts of capital in private companies.

Today, however, investors can get in the game by investing small amounts (usually around $1,000; however, the amount varies by company and choice of investment options). Some private equity crowdfunding sites offer investors the opportunity to invest as little as $50 t0 $100.

Online Capital Raising

The raising of private equity capital through crowdfunding is convenient because everything is done online. Once the entrepreneur or investor puts out an offering, anyone online can invest. Similar to campaigns on sites such as Kickstarter, potential investors go to a funding portal website. There, they are able to view all of the equity crowdfunding investment options. They decide where how they want to invest their money and submit their investments.

There are only two restrictions in the process. First, all investors must be older than 18 years old. Also, there is a limit to how much each investor can invest. The amount is based on the individual’s net worth and income.

Top Private Equity Crowdfunding Platforms

Several platforms are available for equity crowdfunding. The three platforms that consistently remain at the top of the list are as follows:

1. SeedInvest

SeedInvest was started by Ryan Feit and James Han in 2012 after seeing that their fellow Wharton classmates struggle to raise capital for their startups. In the process of creating SeedInvest, Feit and Han fought to change securities laws, making it easier for entrepreneurs to raise capital for themselves online. They were instrumental in the passage of the JOBS Act.

The company is now comprised of a team of more than 20 people, helping more than 150 companies raise capital, with a base of some 250,000 investors. SeedInvest was the first platform to be open to investors who are not considered high net worth individuals (HNWIs)Private Wealth ManagementPrivate wealth management is an investment practice that involves financial planning, tax management, asset protection and other financial services for high net worth individuals (HNWI) or accredited investors. Private wealth managers create a close working relationship with wealthy clients to help build a portfolio that achieves the client’s financial goals..

2. Localstake

Localstake was founded by Ryan Flynn and Brandon Smith. Flynn worked in investment banking, and Smith was an investment manager before the two paired up to start the company, wanting to support local businesses in a different way. Localstake was founded on five key principles:

• Everyone should have the opportunity to invest in private companies.
• Investors should invest in an area they know well: their own community.
• Research and decision-making done in a collaborative way make investors more well-informed.
• Raising capital should be done efficiently and inexpensively.
• Small businesses can significantly benefit from the investments of local investors.

3. StartEngine

StartEngine was founded on the premise of helping give investors access to startups and small businesses, allowing investors of all types to support campaigns they believe in. Investors can research and learn about investment opportunities, pledge support, and benefit as the companies benefit. The platform is headed by Howard Marks, co-founder of Activision and chairman of Activision Studios.

More Resources

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