Equity crowdfunding was designed to benefit both investors and startups, but some are concerned on its potential effects on the investment scene. For one, there are heavy filing requirements for the SEC that startups have become confused about. The SEC also requires intense reports on business status. Startups are required to be very transparent with their financials to investors and must be audited and reviewed by an accountant based on the amount you raised.
Others are concerned their company could become liable to investors for failing to generate returns or growth or even being shut down. How does a company protect themselves from investors seeking compensation for their losses? Entrepreneurs should fill out SEC Form C for full disclosure of the risks of investment to investors. As long as the risks involved are properly highlighted, it should be unlikely for an investor to win a lawsuit. To prevent serious losses to investors, FINRA and the SEC have established investment limitations based on income level so an investor will never ‘lose it all’ on a bad investment.
Because equity crowdfunding tends to have smaller investment amounts, the cost of using a platform could even outweigh the benefits of an investors return by diluting the cap table and being charged service fees within the online portal.
On the other hand, equity crowdfunding for startups and entrepreneurs can be attractive because you get more access to a larger pot of investors. This can save you time and money as opposed to dealing with larger and less investors who are either weary or slow and not ready to pull the trigger on a very large investment. Startups can set their own terms for the shares of the company and, in general, feel a greater sense of freedom and control. In equity crowdfunding, the investor has no voting rights and cannot influence the decisions of your startup. They are only investing in the company’s profitability.
Some entrepreneurs have expressed their dislike for the for the fundraising limit of $1 million per year, feeling stifled. But equity crowdfunding was established to be a first round of raising funds, to begin growing and attract other larger investors. It can also be used for future stages of company growth.