Equity Crowdfunding
What are 3 things that can happen after the equity crowdfunding offering?
1. Failed: company failed after the first round of capital raising 2. Dormant: company raised capital once, and then did not raise any additional capital 3. Follow-on transaction: raised additional capital after the first round
What are the two models of crowdfunding?
1. Non-financial return model — Donation based: project funding motivated by philanthropy or sponsorship, without any other remuneration from the crowd — Reward based: financing is provided in the expectation of a reward or a prize (material or not) 2. Financial return model — Debt based: underwriting of debt contract between two parties — Equity based: underwriting by the crowd of the risk capital issued by a company
Explain the 4 phases of fundraising
1. Pitching: business idea is pitched to the platform 2. Due diligence: that the platform does to learn about the company 3A. Private launch (sometimes): in order to prove there are interested investors 3B: Public offering: the platform makes the decision to accept of reject 4. Post-offering: investors given two months to raise capital in the platform for their business idea
Explain the 3 typologies of shares
1. Voting rights are not delivered and there is separation between ownership and control. 2. Direct ownership structure: one share = one vote (directly vote online), collective action problems and coordination costs. 3. Nominee ownership structure: votes are pooled in the hands of the trustee (who monitors on behalf of the crowd), decisions are collectively made and decided as a group, increased agency costs as the financial/strategic objects of trustee may diverge from the crowd.
What are the two types of shares in equity crowdfunding?
A Ordinary: entitled to vote, certain pre-emption rights. B Investment: no voting or pre-emption rights
What are the advantages and disadvantages of crowdfunding for project proponents?
Advantages For project proponents: - low cost of capital - access to investors through comments on the platform (early stage customer feedback) - guidance from platforms - proof of market (reduced uncertainty for follow-on investors) - publicity Disadvantages For project proponents - loss of secrecy (competition, stolen business ideas) - unsuccessful outcome, reputational cost - successful outcome, success fee and coordination costs
What are the advantages and disadvantages of crowdfunding for investors?
Advantages For investors: - access to entrepreneurs through comments on the platform - community building activity - access to products - low cost formal contracts Disadvantages For investors - successful outcome, completion fee and few liquidity options
Explain the secondary market for crowdfunding and compare it to that of a stock exchange.
Companies that use crowdfunding tend to be very small companies, therefore the secondary market for these types of shares are not officially listed on any major stock exchange, but can still be traded. These secondary markets function exactly the same way as a stock exchange. This secondary market is much smaller than the stock exchange secondary market. There are less transactions (due to less interest) and the market may only be open weekly or monthly (instead of daily like stock exchanges).
How does the fundraising process work? Explain Keep-it-All and All-or-Nothing.
Keep-it-All: entrepreneur keeps the entire amount raised regardless of achieving the target All-or-Nothing: entrepreneur keeps nothing unless the target is reached
Explain the role of platforms in equity financing. Explain selection, treatment, and compensation system of the platform.
Platforms match the supply side (investors) with the demand side (entrepreneurs) Selection: due diligence, screening Such as site visits, credit check, monitor account activities, request third party certifications Treatment: pre-launch, on-going, and post-offering services Trustee: monitoring on behalf of the crowd Compensation system: Success fee: percentage of the amount successfully raised (entrepreneurs) Completion fee: percentage of the amount invested, only collected if the investment is completed (investors)
What is equity crowdfunding?
Public and disintermediated Crowdfunding involves an open call, mostly through dedicated platforms on the internet, for the provision of financial resources, either in the form of donation or in exchange for the future product or some form of reward. Equity crowdfunding is more complex and has more information asymmetry than other crowdfunding types.
Why does equity crowdfunding primarily target small investors? What kinds of businesses and business models are suited to equity crowdfunding?
The primary target of start ups on equity crowdfunding platforms are small investors that do not normally have the ability to extensively research and assess potential investments. Therefore equity crowdfunding is suitable for business models that are easy to understand. Equity crowdfunding also has a preference towards conservative business models which act at a regional level, have organic growth, and can quickly generate solid returns for investors.
