Who can do crowdfunding and why equity crowdfunding is not for everyone

who can do crowdfunding

The answer to the question "who can do crowdfunding" could be summarized as "almost everyone," since one of its characteristics is that it is a very democratic tool. For a crowdfunding campaign to be truly useful, however, certain conditions are necessary and motivate that "almost."

To understand whether crowdfunding is a good idea for your project or business, it is first essential to understand the stage of development you are in, your short- and long-term goals, and the resources needed to achieve them.

At the same time, it is essential to learn more about the different types of crowdfunding available and the relevant regulations. When the EU Regulation on crowdfunding comes into force in 2023, some of these rules will change: it is good to always stay alert to what is new.

Who can do crowdfunding: what the regulations say

Crowdfunding as a financial instrument arose primarily to support small and innovative businesses. The first type to see its own specific regulation in Italy was equity crowdfunding: in 2013 Consob drafted regulations to regulate this new phenomenon, which the Decreto Crescita bis had limited to innovative startups only.

Later, in 2015, the great success of equity crowdfunding made the law extend the possibility of using it to innovative SMEs and UCITS funds. More recently, in 2018, even the innovation requirement for SMEs was eliminated. One of the points of the EU Regulation now sets another step forward: the opening of equity crowdfunding to companies other than both startups and SMEs.

This is already the case, however, for lending crowdfunding, which is accessible by businesses of all types and sizes and also by individuals. Individuals must be of legal age, have no serious history of default, and have demonstrable income to support the solvency of the loan.

Moving on to debt crowdfunding, the issuance of Minibonds is now allowed for all non-financial SMEs with a turnover exceeding 2 million euros or a minimum of 10 employees. These conditions exclude banks on one hand and micro-enterprises on the other.

Reward and donation crowdfunding, on the other hand, not being true financial instruments, have milder regulations on entry and any type of entity can take advantage of them.

From theory to practice

Knowing the regulations is essential, but it serves more to exclude certain fields of action than to understand for whom crowdfunding is actually the right path.

In practice, over time, trends and unwritten rules have been defined, identifying the most suitable entities for this capital-raising method and the types of crowdfunding most suitable for each entity.

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Who does it benefit

First and foremost, crowdfunding is predominantly used by startups and SMEs. Even in the types of crowdfunding where large companies are allowed, it is quite rare for them to resort to it. Basically, they do not need it as they can easily access traditional sources of credit with ease and bargaining power. Moreover, there is a fear of a sort of stigma, as if for a large company, resorting to crowdfunding would be a sign of weakness.

This fear, however, is finally coming to an end: large companies are realizing that they can do crowdfunding in certain ways and should do so to strengthen their communities, increase their visibility, and keep up with the times. They are therefore starting to use it for specific projects.

Some types of crowdfunding, then, are better suited to specific categories of businesses than others: reward mode is ideal for retail businesses because it allows market testing for new products to be launched and for creative projects, while service businesses can benefit most from equity crowdfunding. Lending crowdfunding, on the other hand, has become the tool of choice for real estate firms because it allows them to raise resources very quickly without involving investors in project management.

In general, the entities most ready to engage in crowdfunding are those with a high level of technology and operating in the digital sphere. This is because they are already accustomed to operating on the web and using specific tools and languages. However, it does not mean that more traditional companies cannot do it: in fact, it is an excellent opportunity to acquire new skills that will be useful even after the campaign.

When to do crowdfunding

From the perspective of the development stage, in theory starting from an idea for a startup to a more structured enterprise, crowdfunding can always be done. In practice, crowdfunding is yes for everyone, but it imposes certain conditions that may be more difficult to meet at some stages of entrepreneurial development.

It is a path that requires time, commitment and resources. Those who only have an idea in hand probably have plenty of time and willingness to commit but lack financial resources and a structured staff. They can do crowdfunding but will need more time and the results will be proportionate to the starting point. Consultancy support or a dedicated incubation process for nascent startups can be very helpful at this stage.

Early stage startups, not yet on the market or just launched in the market, can use crowdfunding to boost their growth. At this stage, it is important to define goals and resource allocation well, to avoid wasting time and resources in the wrong direction on the wave of enthusiasm. It is also good to be prepared for the possible consequences of clashing with the market, which may require you to correct and redefine your business idea.

SMEs, that is, companies that are already structured and profitable, have an advantage in many respects: they have an idea that works because it has already passed the market test, they have the financial resources, and they have a team. They can then do crowdfunding to support their own development or start new divisions. On the other hand, however, they often do not have the time to devote to the crowdfunding campaign, they have to agree on multiple decision makers in the company, and they are less flexible and open to new things.

Thus, crowdfunding can be done at all stages of a company's development, but each has its own needs and critical issues. 

Why equity crowdfunding is not for everyone

What we pointed out in the last paragraph applies particularly to equity crowdfunding. It is the most complex type, which has a substantial impact on the structure of the enterprise itself and requires more awareness than the others.

Backers of an equity crowdfunding campaign are investors who buy shares in the proposing company with their capital: they become full partners, with varying degrees of participation established upstream by the company. Therefore, the corporate structure must be ready to accommodate such a change and manage it. When a corporate structure does not yet exist, everything must be prepared to organize it later.

Because the level of investor involvement is so high, it is also more challenging to find them: the marketing work must be massive and supported by economic resources commensurate with the expected result.

The paperwork required by an equity campaign is also more numerous than for other types, and should be weighed carefully because it can affect the outcome of the project.

In conclusion, equity crowdfunding is a valuable opportunity for all those who are ready to fully understand it and invest all the necessary resources (few or many) in it, with realistic expectations based on their starting point and a long-term vision.

Se vuoi scoprire di più sul mondo della raccolta di finanziamenti e confrontarti con altre persone con i tuoi stessi obiettivi, iscriviti al gruppo Facebook di Turbo Crowd, la prima società di consulenza marketing nel crowdfunding.

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