Reigning champ 2021-2022. Invest in StartEngine
Reigning champ 2021-2022. Invest
Get iOS App Sign Up
December 17, 2018 | 8 Min Read

The Ins and Outs of Equity Crowdfunding

Equity Crowdfunding

The Ins and Outs of Equity Crowdfunding

For companies that need to raise capital, there are a lot of options they can choose from, but there is no question that raising money is hard. It doesn’t happen with the snap of a finger.

Pitching to friends and family, selling a product before it exists, figuring out which of your friends or LinkedIn connections knows a VC, then eventually pitching to that VC if you can even get the meeting, determining which bank gives fair-termed loans and even what terms are fair. None of these options are easy.

How many credit cards can a founder open before overextending their ability to pay on time?

Eventually, entrepreneurs must turn to outside sources of capital to give themselves enough runway to create a profitable business, and where that capital comes from and on what terms are questions that must be carefully weighed before a decision is made.

Lucky for entrepreneurs, there is now another door that entrepreneurs can open to access capital: equity crowdfunding.

Equity crowdfunding is raising capital from the crowd through the sale of securities (shares, convertible notes, debt, revenue share, and more) in a private company (that is not listed on stock exchanges).

Let’s unpack that idea.

1. Equity crowdfunding is raising capital from the crowd online.

Anyone can invest in your offering under equity crowdfunding. You can think of it as similar in function to a Kickstarter or Indiegogo campaign, in which potential investors visit a funding portal website and can explore different equity crowdfunding investment opportunities. There are certain restrictions, in that you have to be over 18 and there are limits on how much capital an individual can invest based on their income and net worth.

2. Equity crowdfunding is the sale of securities.

The key difference between a crowdfunding site like Kickstarter and equity crowdfunding is what is being sold. With Kickstarter campaigns, entrepreneurs raise capital through the presale of their product, often at a discount, or through tiers of various perks to attract their fans and potential customers. Once the “investor” of a Kickstarter campaign receives their product or perk, the contract between the company and investor is over.

With equity crowdfunding, companies sell securities, whether in the form of equity in the company, debt, revenue share, convertible note, and more. Equity crowdfunding gives investors skin in the game.

Source: Please note a KingsCrowd Edge subscription is required to access this report.

Investors in equity crowdfunding don’t participate just to buy a product at a discount a year before its release; they stand to make a profit if they make a good investment and the company they invested in grows. This has benefits for the company as it can create hundreds of brand ambassadors who want to see you succeed, and that is an audience the company can depend on to spread the word about their business and share the product with their own networks.

3. The entrepreneur raising capital dictates the terms.

What makes this more appealing is that the entrepreneur raising capital has total control of the offering: what to sell, how much, and at what price are entirely up to the company raising capital. They set the terms, including their valuation and how much capital they hope to raise.

Even better, companies can set a minimum funding goal alongside their desired maximum, so if they don’t reach their funding goal in total, the entrepreneur can still successfully raise capital, and those who want to invest can do so even if the market interest isn’t enough to reach $5M, for example, which is the limit of Regulation Crowdfunding (more on that below).

Of course, the more reasonable the valuation and terms, the more likely an equity crowdfunding offering is to succeed and raise capital, but there is no VC or powers that be demanding certain terms.

4. The companies raising capital are private companies.

Historically, the general public could only buy shares in public companies: those that had done an IPO and whose stocks traded on national exchanges, and those opportunities are growing fewer by the year.

The unfortunate truth today is that IPOs are declining. Today, there are less than 4,000 publicly traded companies, less than half the number of public companies in the 90s. The reason for the decline is that becoming a fully reporting public company is a large financial burden that only very large companies can handle. IPOs are not viable for startups or even medium-sized businesses.

This means two things:

  • a) it is hard for smaller companies to create liquidity for their shareholders
  • b) investors’ options to invest their savings in stock are shrinking every year

However, the companies raising capital through equity crowdfunding are private and yet raising capital from the public. Traditionally, buying equity in a startup was reserved to accredited investors (those who have a net worth of more than $1M, excluding their home, or those who make over $200K annually over the past two years).

In other words, only the wealthy could invest in these opportunities, the VCs, the angel investors. Through equity crowdfunding, everyone has access to these opportunities. Investing in private companies has been democratized. This solves b), but what about liquidity?

Creating Liquidity

The ability to invest in private companies used to carry a caveat: investors could see large returns (emphasis on the could as most startups fail), but in order to see those returns, the investors’ capital would be locked up in that startup for 5-10 years. There was little to no liquidity in the investment. Investors had to wait it out and hope the company went public via an IPO or was involved in a merger or acquisition.

For wealthy investors, the lock-up is manageable as they have other liquid capital to support themselves in the meantime. However, this lockup isn’t so manageable for less wealthy individuals.

The lock-up period also had another negative consequence for the entrepreneur: in order to get investors to bite, the terms are heavily discounted to account for the risks that come with the longer time frame.

With equity crowdfunding, these shares can be traded on public markets. If, after a year, an investor no longer wanted to own shares in a company, they could sell them on an ATS to an interested buyer. This liquidity is possible in a way that it wasn’t before because the rules of equity crowdfunding allow companies to have more shareholders before it is required to become a publicly reporting entity.

With more shareholders, there is a larger market. With a larger market, there is liquidity. The alternative structure of dozens or even hundreds of accredited investors putting in larger amounts of capital into a private business doesn’t create a large enough market to offer liquidity in the way that having thousands, or even tens of thousands, of investors does.

What’s the catch?

If equity crowdfunding is so great, then why haven’t more people heard of it? Of the 6 million businesses in the US,  only ~1,400 entrepreneurs have tried it. Possibly because it’s relatively new. President Obama signed the JOBS Act, which enabled equity crowdfunding, in 2011. However, the two regulations of equity crowdfunding weren’t implemented until June 2015 and May 2016.

For investors, the process of investing in equity crowdfunding is straightforward, but on the other end there are certain regulatory requirements entrepreneurs have to follow. There are two routes entrepreneurs can take:

  1. Regulation Crowdfunding – through which companies can raise up to $5M annually. Companies can start raising capital at little or no cost after filing a Form C with the SEC, but to raise more than $107,000, an independent CPA must review the company’s financials for the past two fiscal years, or since incorporation. In order to raise more than $1,070,000, a financial audit is required.
  2. Regulation A+ – the mini IPO, through which companies can raise up to $75M annually. However, before a company can start raising capital under Regulation A, the company must hire a securities attorney in order to create a Form 1-A that is then submitted to the SEC for qualification (qualification takes 3-5 months at minimum). Companies also have to conduct a financial audit for the past two fiscal years.

Editor’s note: this article was updated on March 25, 2021 to reflect the SEC’s regulatory changes to equity crowdfunding that went into effect on March 15th.

Want to stay up to date with the latest posts from StartEngine? Sign up here:

You May Also Like

Important Message


Unless indicated otherwise with respect to a particular issuer, all securities-related activity is conducted by regulated affiliates of StartEngine: StartEngine Capital, LLC, a funding portal registered here with the US Securities and Exchange Commission (SEC) and here as a member of the Financial Industry Regulatory Authority (FINRA), or StartEngine Primary, LLC, a broker-dealer registered with the SEC and FINRA/SIPC. You can review the background of our broker-dealer and our investment professionals on FINRA’s BrokerCheck here. StartEngine Secondary is an alternative trading system regulated by the SEC and operated by StartEngine Primary, LLC, a broker dealer registered with the SEC and FINRA.

Investment opportunities posted and accessible through the site are of three types:

1) Regulation A offerings (JOBS Act Title IV; known as Regulation A+), which are offered to non-accredited and accredited investors alike. These offerings are made through StartEngine Primary, LLC (unless otherwise indicated). 2) Regulation D offerings (Rule 506(c)), which are offered only to accredited investors. These offerings are made through StartEngine Primary, LLC. 3) Regulation Crowdfunding offerings (JOBS Act Title III), which are offered to non-accredited and accredited investors alike. These offerings are made through StartEngine Capital, LLC. Some of these offerings are open to the general public, however there are important differences and risks.

Any securities offered on this website have not been recommended or approved by any federal or state securities commission or regulatory authority. StartEngine and its affiliates do not provide any investment advice or recommendation and do not provide any legal or tax advice with respect to any securities. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. StartEngine does not verify the adequacy, accuracy or completeness of any information. Neither StartEngine nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, or completeness of any information on this site or the use of information on this site. See additional general disclosures here.

By accessing this site and any pages on this site, you agree to be bound by our Terms of Use and Privacy Policy, as may be amended from time to time without notice or liability.

Canadian Investors

Investment opportunities posted and accessible through the site will not be offered to Canadian resident investors. Potential investors are strongly advised to consult their legal, tax and financial advisors before investing. The securities offered on this site are not offered in jurisdictions where public solicitation for offerings is not permitted; it is solely your responsibility to comply with the laws and regulations of your country of residence.

California Investors Only – Do Not Sell My Personal Information (800-317-2200). StartEngine does not sell personal information. For all customer inquiries, please write to

StartEngine’s Reg A+ offering is made available through StartEngine Crowdfunding, Inc. This investment is speculative, illiquid, and involves a high degree of risk, including the possible loss of your entire investment. For more information about this offering, please view StartEngine’s offering circular and risks associated with this offering.

StartEngine Marketplace

The availability of company information does not indicate that the company has endorsed, supports, or otherwise participates with StartEngine.

None of the information displayed on or downloadable from (the 'Website') represents a recommendation, offer, or solicitation of an offer to buy or sell any security. It also does not constitute an offer to provide investment advice or service. StartEngine does not (1) make any recommendations or otherwise advise on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

All investment opportunities are based on indicated interest from sellers and will need to be confirmed.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks, and you should complete your own independent due diligence regarding the investment. This includes obtaining additional information about the company, opinions, financial projections, and legal or other investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

StartEngine Marketplace (“SE Marketplace”) is a website operated by StartEngine Primary, LLC (“SE Primary”), a broker-dealer that is registered with the SEC and a member of FINRA and the SIPC. StartEngine Bulletin Board ("SE BB") is a bulletin board platform that advertises interest in shares of private companies that previously executed Reg CF or Reg A offerings. SE BB enables shareholders to communicate interest in potential sales of shares in private companies and investors to discover, review, and potentially invest in private companies. As a bulletin board platform, SE BB provides a venue for investors to access information about private company offerings and connect with potential sellers. SE BB is distinct and separate from StartEngine Secondary (“SE Secondary”), which is an SEC-registered Alternative Trading System (ATS) operated by SE Primary. SE Secondary facilitates the trading of securities by matching orders between buyers and sellers and facilitating executions of trades on the platform. While a security may be displayed on the bulletin board, these securities will be subject to certain restrictions which may prevent the ability to buy and sell these securities in a timely manner, if at all. Even if a security is qualified to be displayed on the bulletin board, there is no guarantee an active trading market for the securities will ever develop, or if developed, be maintained. You should assume that you may not be able to liquidate your investment for some time or be able to pledge these shares as collateral.

Invest in StartEngine

190% YoY Growth: Invest in the leading equity crowdfunding platform.

This Reg A+ offering is made available through StartEngine Crowdfunding, Inc. This investment is speculative, illiquid, and involves a high degree of risk, including the possible loss of your entire investment. For more information about this offering, please view StartEngine’s offering circular and risks associated with this offering.


Kevin O’Leary is a paid spokesperson for StartEngine. Read the 17(b) disclosure here.

Founder's Summit Application