What is equity crowdfunding?

Definition of equity crowdfunding

Equity crowdfunding allows a group of people (the “crowd”) to invest in a company that isn’t listed on the stock market, and to receive shares (or equity) in that company in return. Equity crowdfunding is also known as investment crowdfunding and crowd investing.

Equity crowdfunding is one of several ways that a business can raise investment. Other more traditional methods include taking out a loan or seeking institutional investment. Equity crowdfunding campaigns are usually hosted on third-party platforms that ‘broker’ the investment between the company and the investor. In the UK, these platforms include Crowdcube and Seedrs, both of which have regulatory approval from the Financial Services Authority (FSA).

Every equity crowdfunding opportunity is different; the objectives and terms of each campaign will be set by the company seeking investment. The details of the opportunity - including the minimum investment amount and the length of time that people have to invest - should be available on the crowdfunding platform that hosts the campaign.

After investing, people who receive shares in the company have partial ownership of it. This means that if the company performs well, the value of the shares will increase, and the investor will stand to make a profit. If the company performs badly, however, the value of the shares will decrease, and the investor could stand to make a loss.

Frequently Asked Questions

Is tax relief available through equity crowdfunding?

In the UK, many investment opportunities offered through equity crowdfunding platforms offer tax reliefs through either the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). These schemes provide tax relief that covers from 30% to over 75% of an investment into an eligible company.

How do investors make a return on their investment?

If the company is in a position to pay its shareholders, there are three ways that crowdfunding investors can see a return on their investment:

  • Dividends: shareholders sometimes receive a percentage of the company’s yearly profits.
  • Trade sale: if the company is bought by another company for a lump sum, this is divided proportionally among shareholders.
  • Public offering: if the company is successful enough to list on a stock exchange, shareholders can sell their shares.

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FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.

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