The global role of equity crowdfunding

Recently, the economy has seen an increase in equity crowdfunding – the process of investors pledging money to unlisted businesses in exchange for shares. In its roughly six-year lifetime, around £500m has been raised via equity crowdfunding in the UK, proving its credibility amongst traditional ways of raising funds for businesses.

With equity crowdfunding becoming so popular, several questions are being raised. What is the role of equity crowdfunding beyond the UK? How does it compare to other traditional forms of fundraising? And what will the future hold? This article will explore these questions in more detail, to answer: What is the global role of equity crowdfunding?

Do other countries use equity crowdfunding?

To begin by looking at the global role of equity crowdfunding, it’s vital to look at other country’s attitudes towards it. While countries such as the UK, the US and New Zealand are prolific in their use of this type of crowdfunding, other countries have strict regulations in place to protect both businesses and investors.

One major country where equity crowdfunding is prohibited by law, is India, which has a thriving economy and a huge population in excess of 1 billion people. Given that such a large percentage of the world’s population is legally banned from equity crowdfunding, it stands to reason that it is not reaching its full global potential.

Another key country where equity crowdfunding is listed as illegal, is Singapore. Singapore’s economy is highly-developed and highly trade-orientated, so the legislation ruling against equity crowdfunding in the country means that businesses in Singapore are missing out on a major means of raising funds for their businesses.

While equity crowdfunding still occurs in countries in which it is illegal, the risk of breaking the law deters many businesses and investors from being involved with it. This means that on a global scale, equity crowdfunding is currently not realising its potential.

How does it compare to traditional funding models?

There are a plethora of other ways that unlisted/start-up businesses can gain funding, all of which have their own perks and pitfalls for the investor and the business.

While angel investing – the method that funded Facebook and Uber – has been traditionally limited to high net worth investors, it offers a more personable approach to raising funds.

Given that investors put a large sum of money into the company, they often follow-up this money with other types of support, to nurture the business and try to ensure its success.

This is something that equity crowdfunding often lacks, meaning that while businesses end up with a lot of cash, they may lack other support needed to grow a business.

Unlisted businesses can also gain funding from the bank, as a loan. While business loans are hard to obtain, and carry obvious risks if the business fails, they allow the company founder more control over their business, should it be successful.

If the business goes on to be very profitable, once the owner has paid back the loan, they will likely be the only/primary shareholder in the business. That means not having to share any profit with other parties. This is the opposite of equity crowdfunding, where there are often lots of investors to split profits between.

Equity crowdfunding also comes with its own significant risks. Every time an investor puts money into an unlisted business, they run the risk that the business will fail, and all their money will be lost.

Additionally, if the business does take off, the investment is likely to be illiquid for a few years – meaning that the investor cannot take the money back out of the business for a certain time.

Furthermore, the notion of crowdfunding means that a successfully crowdfunded business will likely have a multitude of investors; while this isn’t necessarily a bad thing, investors must be aware that their shares will be diluted in future funding rounds.

Every method of raising funds carries its own risk and reward, and whichever method(s) the business chooses will depend entirely on the type of business it is, and the options available.

The difference between each type of fundraising indicates that it’s unlikely, going into the future, that equity crowdfunding will totally replace traditional funding models, however it’s place in the global fund raising is assured and will only grow.

The future for the global role of equity crowdfunding

The future of equity crowdfunding is difficult to predict. However, there are some patterns emerging, which help to paint a picture.

Given that more countries are taking part in it, if countries like India and Singapore remove the restrictions, we could see a huge rise in the amount of businesses worldwide that are funded via equity crowdfunding platforms.

In countries where equity crowdfunding is legal, there may also be a removal of certain limits placed on investors, for example, increasing the amount of money investors are legally allowed to invest into a business.

As more money is allowed by the authorities to be invested, there should be a subsequent surge in the amount of successfully equity crowdfunded businesses, which so long as the businesses have sound foundations, should be positive for the economy, investors, and businesses.

Summary

Equity crowdfunding has played a key role in helping support small businesses worldwide, but it’s worth remembering that it’s still early days, and changes in the economy and market trends may cause a shift in how it works – either positively or negatively.

Exactly what role equity crowdfunding plays in the global economy of the future, is still to be determined. Once thing is for sure however, if conducted in the correct manner, equity crowdfunding will have a positive future and should benefit all parties involved.

Despite the risks attached, equity crowdfunding has truly earnt its place amongst the other game players as a viable means of raising money for an unlisted business, and its future is exciting.

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Rachel Stone writes for Shadow Foundr