Equity crowdfunding: how does it work?

In recent years, equity crowdfunding has become increasingly popular among entrepreneurs seeking capital to develop their project. Indeed, it is a flexible and effective financing tool that allows it to overcome the limitations usually imposed by traditional financing methods, such as lack of accessibility and slowness. In fact, when used efficiently, equity crowdfunding can give your project a real boost, helping you quickly raise the money you need to grow it. In this article, let's look together at what equity crowdfunding is, how it works, and what aspects you need to consider to set up a successful campaign.

Equity crowdfunding how it works: definition

To understand what equity crowdfunding is and how this tool works, one must first understand what crowdfunding in general consists of.

The term crowdfunding – from the English "crowd," crowd, and "funding," financing – denotes an alternative financing tool to traditional methods (such as loans and mortgages), which allows small and medium-sized businesses and startups to raise the funds they need for their growth by turning directly to the "crowd" of the web, instead of banks and lending institutions. Crowdfunding basically consists of online fundraising, open to all, which is done through dedicated platforms.

Those who participate in crowdfunding receive a reward for their money, which can be concrete or symbolic, depending on the crowdfunding model chosen. There are, in fact, different types of crowdfunding: reward, donation, lending and, indeed, equity.

The peculiarity of "equity-based" crowdfunding is that investors receive a share of ownership in the offering company in return for their financial contribution. This means that if the fundraising is successful - that is, if the minimum predetermined goal is reached within the set timeframe - the participants become official shareholders of the company, obtaining all the financial and administrative rights derived from their ownership stake in the company.

Italian legislation on equity crowdfunding

Equity crowdfunding is regulated in Italy by specific legislation. In this sense, our country boasts a real record: in fact, Italy was the first in Europe to have developed a regulation on equity crowdfunding.

The text governing equity crowdfunding is the "Regulations on the raising of venture capital through online portals" adopted by Consob in Resolution No. 18592 of June 26, 2013 and later amended by Resolution No. 19520 of February 25, 2016.

While equity crowdfunding was initially an exclusive prerogative of startups, the second resolution introduced the possibility of using this tool for innovative SMEs as well. With the 2017 Budget Law, this opportunity was also extended to S.p.A. and then came to include, with Decree Law n- 50 of April 24, 2017, all SMEs.

Consob also carries out supervisory activities on equity crowdfunding portals. Specifically, there is a register of portal operators that is divided into two sections:

• the ordinary section, which is reserved for managers authorized by Consob after verifying the presence of certain requirements (such as the legal form of a corporation and the submission of a report on business activity and organizational structure);
• the special section, where "managers by right," i.e., licensed banks and investment firms that have notified Consob of the conduct of equity crowdfunding portal management, are located.

Equity crowdfunding: how to start a campaign

Once you have made the decision to use equity crowdfunding to finance the growth of your company, all that remains is to take action. To start an equity crowdfunding campaign, a series of steps must be followed. Let's look at them in detail.

1. Establish a collection goal

Every equity crowdfunding campaign has a minimum goal, corresponding to the minimum amount that must be raised for the crowdfunding to be successful (and for all investors to actually become partners in the project). In most cases, platforms also require the setting of a maximum goal, once this is reached, the campaign automatically closes and no more memberships are accepted.

It is not enough to determine the amount of funds you want to raise, but also to specify how these funds will be used and for what purposes.

2. Identify the appropriate platform

Equity crowdfunding capital raisings take place on specialized platforms regulated by Consob. A large number of them have sprung up in recent years, each with different characteristics: from more specific ones focused on a particular crowdfunding mode (such as equity) or on certain sectors and market niches, to more "generalist" ones that host different types of fundraising and projects.

The choice of the platform on which one's collection will take place should never be driven by chance, but should be based on considerations related to the type of project to be funded, the crowdfunding mode chosen, the preparedness of the team, etc.

3. Prepare the necessary documentation

Once you have chosen the platform, you will need to prepare all the necessary documents and materials to put your project online. As specified just above, each platform has its own unique characteristics, so the documentation and requirements may also vary. In general, it is always essential to provide a detailed presentation of the project and a business plan.

From a bureaucratic point of view, when starting an equity crowdfunding campaign, it is also necessary to sign two types of documents: the capital increase and the offering document.

4. Create an appropriate marketing strategy

An equity crowdfunding campaign is never just a financial transaction. On the contrary, it is a real marketing campaign in which the object to be sold is not the company's product/service, but the company itself. Basically, when initiating a capital raising you need to be able to convince potential investors to "buy" the project, financing its future development.

For this, it is not enough to simply post your crowdfunding on the platform and wait for investors to magically arrive on their own. Instead, you need to come up with a targeted and detailed marketing strategy – including emails, social media advertising, press releases, and more – aimed at getting the word out about your project and the opportunity to become a part of it to as wide an audience as possible. In other words, you need to formulate an action plan to sell your crowdfunding campaign and make it attractive in the eyes of potential investors.

5. Thinking about rewards/incentives for investors

To make the prospect of investing in the project even more appealing, it is recommended to think of exclusive rewards or prizes to offer your investors (the so-called rewards), which would motivate them even more to participate in the collection. For example, one can give a chance to buy a certain number of shares at a lower price to those who finalize the investment within a certain period or give away a discount on the purchase of the company's product/service.

The purpose of rewards is, in practice, to provide an extra reason to join and, in the case of offers that are only valid for a limited time or quantity, to create a sense of urgency and scarcity, enabling the collection goal to be reached more quickly.

Equity crowdfunding campaign: how to avoid flop

Although a relatively new tool, equity crowdfunding has become increasingly important in recent years in Italy and Europe: in 2021, nearly 200 campaigns were successfully concluded in our country, involving more than 24,000 investors and raising an average of 130 thousand euros (source: CrowdfundingBuzz).

Undoubtedly, equity crowdfunding is a very advantageous mode of financing for companies, as it allows them to circumvent the obstacles that one must punctually come up against when seeking funds for one's project. These include, in particular, the lack of accessibility of bank financing (which requires numerous requirements and guarantees), and the slowness and complexity of this system. Equity crowdfunding represents, on the contrary, a flexible and affordable tool that, if used in the right way, allows you to get capital quickly.

La scelta di ricorrere all’equity crowdfunding per finanziare il proprio progetto non è tuttavia priva di rischi per un’azienda.  In particolare, avviando una campagna di equity crowdfunding ci si espone al rischio “reputazionale” che la raccolta possa fallire, con conseguenze negative sull’immagine dell’azienda. La paura è che, in caso di mancato raggiungimento dell’obiettivo, il progetto possa perdere attrattività agli occhi dei potenziali investitori, pregiudicando eventuali iniziative future. Inoltre, l’insuccesso della campagna rappresenta un danno anche dal punto di vista economico in quanto comporta la perdita dei costi affrontati per implementarla.

Rely on an agency specialized in equity crowdfunding

To prevent one's equity crowdfunding campaign from becoming a flop, it is crucial to plan the campaign in every detail, thus reducing any risks and maximizing the advantages of this tool. In particular, it is essential to ensure the effective promotion and presentation of the project to investors by adopting an appropriate marketing strategy. The key is not to leave anything to chance: even the best project in the world, if not effectively sponsored, runs the risk of going unnoticed.