Equity crowdfunding offers investors a stake in a company in exchange for funding. Although there are exceptions, these businesses are normally private and not listed on an exchange. In the past, these businesses would have sold shares only to angel investors or venture capital firms.
Like almost any form of investment, your money is at risk when you invest using equity crowdfunding. To help you decide whether this form of investment is for you, we’ve listed the advantages and disadvantages below:
Advantages of Equity Crowdfunding
- High Returns on Successful Investments
Of course, future results may vary, but in its short history so far, equity crowdfunding has delivered some excellent returns. For example, when Camden Town Brewery was sold to AB InBev in December 2015, investors received a return of almost 70% on their investment.
- Invest in Exciting Startups
The businesses seeking to crowdfund tend to be relatively small, often pre-profit, with exciting potential to disrupt their niche.
- Invest in Brands You Believe In
For many investors, equity crowdfunding isn’t just about investing to make a profit; it’s also about getting involved with a brand you’re passionate about.
- Tax Incentives
A lot of the businesses seeking equity crowdfunding are eligible for either the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). These schemes offer investors tax relief on their investment.
Disadvantages of Equity Crowdfunding
- Low Barrier to Entry
Some equity crowdfunding investments can be accessed for as little as £10, making this form of investing one of the easiest to get into with a low budget.
- High Risk
If you were to invest in ten different crowdfunding investments, it would not be unusual for eight of them to fail – and it’s not outside the realms of possibility that nine or even all ten will fail.
Risk Warning: Investing in early stage businesses involves a high level of risk, including illiquidity (inability to sell assets quickly or without substantial loss in value), lack of dividends, loss of capital and dilution risks and it should be done only as part of a diversified portfolio. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Your capital is at risk.