Publication 9. 2020
In the previous publication, we discussed some examples of existing Donation-Based Crowdfunding and Rewards-Based Crowdfunding platforms. Now let us have a look at Equity-Based Crowdfunding and Debt-Based Crowdfunding.
Equity-based crowdfunding allows an investor to partly own the business they are investing in. These investors trade the capital to gain company shares and receive a financial return, such as a dividend on their actual investment. There are often times when the investors also earn a profit in return for their real investment.
There are a few popular Equity-based crowdfunding examples we will mention such as Quirky, Invesdor, Symbid, SeedUps, Eureeca, Wefunder and PeerReality (*) (see Important note at the end of the article):
People often wrongly don’t realize they should carefully consider the differences between debt instruments through debt-crowdfunding and equity-based funding. There are some similarities between both categories, but a significant difference that sets them apart, ( just as there is a significant difference in investing in debt or equity securities on a securities exchange) is that with equity-based investments the investors normally look to receive a dividend in return on their actual investment. And again, this is totally dependent, of course, on both the profit (results) of the company and of the dividend policy of a company. However, with debt instruments, the repayment and interest terms are mostly fixed from the start. The business has to follow those terms and make the payments accordingly.
Some examples of successful Debt-based crowdfunding platforms include Prosper, Lending Club, and Kiva (*):
Crowdfunding is clearly a new mechanism of acquiring funding to launch or grow a business. Typically, this funding is obtained with the help of online platforms. Different companies can present their business ideas to numerous investors at the same time.
Unlike conventional methods, these investors can also be a member of the general public and not necessarily a financial institution. The investment amounts can differ according to the requirement of the business and the capability of the lender. A common attractive characteristic is that often the minimum investment amounts are very low, thus enabling the larger public to participate in something they really like or believe in. These donation-based, rewards-based, equity-based, and debt-based crowdfunding platforms have seen enormous success in the past few years and it is interesting to see up to what degree they are moving towards taking over the conventional financing system. In the next publications, we will look some more to equity-based crowdfunding and then especially from a general perspective: looking at the risks, rewards, and regulations that come with such investment opportunities. We will also explore a case study to obtain insights into opportunities and challenges that lead to a successful functioning platform.
(*) IMPORTANT NOTE: the mentioning of the platforms in this publication is by no means to be interpreted as a favorite choice or promotion of one platform above any other platform by the DCSX and simply intends to give some examples. Other similar platforms can be easily researched on the web.
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