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Investing through crowdfunding

Tuesday, 12 April 2016

When exploring how to invest in businesses you will discover that there are many methods available and you should not overlook the option of investing through a crowdfunding website. There are two types of crowdfunding. The most common campaign is where a business offers people a product (often at a discount) or gift in return for their money. The second form of crowdfunding is where businesses offer equity shares in return for their money.

When a business decides to run an equity share crowdfunding campaign they will advertise the amount of equity that is on offer as well as a description of the business so you can make an informed decision. Anyone can invest in a company through a campaign such as this because the minimum investment can be as little as £5. However, the return is calculated proportionately. Therefore, if the business is advertising 10% of the company’s equity shares an individual investment of £5 is not going to make a great deal of money compared to someone making a larger investment in the same crowdfunding campaign. 

This form of investment has come about with the development of the internet and although it is more accessible, the risks of an investment should be treated the same. There are a number of equity based crowdfunding websites with hundreds of businesses wanting to raise capital. When considering investing through a crowdfunding website it is wise to research the companies and their markets so you can make an informed investment decision. Additionally, an investor should bear in mind that they will be sharing the company’s successes and failures with the rest of the crowd. Crowd funding should be considered as high risk investment.  Crowd investors are also not likely to have a say in how the business is run due to the large number of individual investors.

If the business is unsuccessful at achieving their capital goal the business may not receive any investment and the investors will not part with their money. If the business does achieve its goal the crowdfunding website will usually complete the legal documentation for the investment and give you time to review your investment. Once you have received the legal documentation it is important that you seek legal advice from a specialist investment team. Rollingsons experienced business investment team will be able to review the documentation provided by the crowdfunding website to ensure your investment is properly protected through business ownership. We do not give generic investment advice, but instead give legal advice on the rights and responsibilities or investors and investees. For more information or to arrange an initial consultation, please contact us on 0207 7611 4848.

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