Basic Principles
Equity crowdfunding involves a company posting its business plan, financial projections, and equity stake on an online platform in the hope of attracting investors from the public. Typically, equity crowdfunding platforms set a minimum and maximum funding target. If a project is 100% funded, the funds are given to the company, and investors get ownership in proportion to their investment. If the project does not reach its funding target, the money is returned to the investors.
Globally, there were over 750 equity crowdfunding platforms in operation by the end of 2023, with an estimated 15 million investors. Each investor, on average, contributed around $1,200 per platform.
Advantages and Challenges
Advantages
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Lowering the financing threshold: Traditional models of capital, such as bank loans or venture capital, require companies to have a certain operating history and credit rating. Equity crowdfunding makes it far easier and more cost-effective for early-stage companies to raise funds. According to figures, start-ups that use equity crowdfunding platforms can collect enough funds in 60 days or less, effectively reducing the time required by 50% compared to conventional means.
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Risk diversification: Equity crowdfunding allows investors to spread their investments across different projects, reducing risk. In the UK, where the equity crowdfunding market is vibrant, investors backed an average of five different projects in 2022, investing between $500 and $5,000 per project.
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Community effect: Companies raising funds through equity crowdfunding also create a loyal base of users and brand advocates. According to studies, 85% of equity crowdfunding investors are willing to engage in brand advocacy following a successful investment.
Challenges
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High investment risk: Businesses listed on crowdfunding platforms are usually just getting started, so they have a loose financial footing, making the investment inherently risky. Statistics show that around 75% of startups become insolvent within five years from the time they are crowdfunded, which means investors face a higher chance of losing their investment.
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Incomplete market regulation: Equity crowdfunding has gradually been regulated by more and more countries, but in some areas, the law is lacking in terms of information disclosure and investor protection. Nearly 40% of countries and regions currently have no complete regulatory system for equity crowdfunding, which may lead to significant legal risks for investors, according to a report by IOSCO.
Market Status and Trend Analysis
Global Market Data
According to Statista, the global equity crowdfunding market grew from $10.75 billion in 2021 to $13.17 billion in 2022, a 22.5% increase. The global equity crowdfunding market size is projected to reach $35.52 billion by 2027, with a compound annual growth rate (CAGR) of around 21.3%.
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European Market: Europe is one of the most rapidly expanding markets for equity crowdfunding, especially in the UK, where equity crowdfunding has emerged as a significant financing option for startups. UK companies raised just over £1.8 billion on crowdfunding platforms in 2022, accounting for more than 60% of Europe’s total equity crowdfunding funding volume that year.
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Asian Market: The Asian market has also shown fast growth in recent years. Despite China tightening regulations around internet finance in 2015, its market remains active. Data shows that China’s equity crowdfunding market was worth over ¥6 billion in 2021, with an annual growth rate of about 35%, according to Tsinghua University’s Internet Finance Research Center. Japan and South Korea are also growing their crowdfunding markets, with Japan raising $800 million on its platforms.
Global Investor Data
In 2022, there were 15 million investors on global equity crowdfunding platforms, and this number is expected to grow significantly by 2025. The United States is the largest equity crowdfunding investment market in the world, with 8.5 million Americans investing in crowdfunding projects in 2022, accounting for 56% of global investors.
