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Equity crowdfunding: an overview

Equity Crowdfunding

is a new method of financing that largely uses the Internet to get people to give small sums of money to promote the activities of a particular cause or invest in a business. In return such individuals may be given some gifts or other products or become part owners. They can also get some additional benefits from their association with such causes.

Equity Crowdfunding has a portal that acts as a broker or intermediary and such agencies need to be listed with government agencies who overlook such activities. It is the job of the portal to ensure that every person who puts in any money has fully understood the cause or business interests for which they are giving money or investing. They, the portals, are however, forbidden to solicit any business. They are needed to implement any investor protection measures that are required by controlling state agencies.

Issuers requiring such funds have to follow certain procedures before they can get such equity based crowdfunding. They require to have their own website, besides a physical address. The name of the issuer and the legal status of the issuer needs to be well publicized. They are needed to list the names of officers and directors of the issuing firm, and also details of any persons who hold over twenty percent of the issued shares. The anticipated business plan must follow details of the issuer’s business. Financial condition of the issuing company must be listed on the broker portal, as well as the issuer’s website, so that any investors can gauge their soundness. Other statutory requirements like tax returns and any financial statements help an investor of such equity based crowdfunding to make educated guesses as to the soundness of the enterprise. The purpose of raising the necessary funds through this method of financing must be clear. Time limits have to be set to reach targeted financing amounts, and regular updates need to be posted on the way to achieving targets. Purchasers are normally expected to hold on to the equity for at least a year.

Crowdfunding has been around as a concept for the past two decades, and started out with fans of a popular band getting together to raise money to help them with tour expenses. This was done without the knowledge of the ultimate recipient. It developed further to promote sports events.
Most such equity based crowdfunding or social funding uses a all-or nothing model, where minimum amounts are set. If these minimum amounts are not raised, the project or issuer does not receive the funding. This restriction dealt with the reality that certain projects needed a minimum amount of money to get of the ground, and if such sums were not forthcoming, the projects could never start, and all such funding will have been of no use.

Equity based crowdfunding is a form of lending. Present laws allow companies to raise funds that are less than one million every year. Investors are prohibited from putting in more than five percent of their annual income, of their income when it is lower than hundred thousand dollars. With this investment, each investor becomes a part owner of the business.

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