Equity crowdfunding vs capital increase: differences

An equity crowdfunding campaign consists of selling shares in the company to a multitude of online investors, so it corresponds to an opening of the company's capital stock. Equity crowdfunding and "traditional" capital increase both aim to raise capital for growth. However, the two operations have some fundamental differences in nature and process. 

For some companies or at certain stages of a company's life, one choice may be better than the other: let's find out the characteristics of each and the differences to learn how to use these capital raising instruments in the best way.

Capital increase: how it works

A traditional capital increase consists of theissuance of new shares or units by a company, with the aim of placing them with private contacts in the company's network, the shareholders themselves, and institutional investors. 

Here are the main steps for make a capital increase.

Assembly Resolution:

The shareholders' meeting must approve the capital increase. During this stage, the amount to be raised, the manner of subscription, and the price of the new shares are determined.

Right of Option:

Existing shareholders have the right to subscribe first for new shares in proportion to their holdings. This mechanism ensures that corporate control remains in the hands of existing shareholders. In some circumstances, the pre-emptive right can be excluded, such as for engaging strategic investors.

Subscription of Units:

Once the option is offered, members or any new investors subscribe to the new shares, committing to pay the required capital. 

Capital Payment:

The payment can be made in cash or in kind (tangible or intangible assets), but at least 25% of the amount must be paid immediately.

Entry in the Register of Companies:

The procedure ends with the registration of the capital increase resolution in the Companies Register, making the transaction official.

Equity Crowdfunding: how it works

Equity crowdfunding involves a capital increase at a notary public, but uses online platforms to place shares with a wide range of investors not necessarily known to the company. We summarize the main steps here, which can be explored further in our article on how equity crowdfunding works.

Business Plan: 

Development of a detailed plan outlining the company's activities, its goals, its pre-money valuation And the potential for growth.

Platform Selection:

The company chooses an authorized equity crowdfunding platform and sends the application to launch a campaign, which will go through a process of selection.

Campaign preparation: 

Defining the goal of the campaign, of the types of shares and the premium based on the pre-money valuation, preparation of investor documentation, creation of promotional materials and a communication strategy to attract investors, initiation of the collection of expressions of interest in investing in the precrowd.

Launching the Campaign: 

The campaign is posted on the platform, with a minimum and maximum collection goal. Investors can review the project and decide whether to contribute.

Achievement of the Goal: 

If the campaign reaches the minimum goal, the funds are transferred to the company, and investors receive their shares. If not, the funds are returned to the investors.

Equity Crowdfunding vs. Traditional Capital Increase

The traditional capital increase is a established procedure for equity crowdfunding, while equity crowdfunding is a'innovative operation which falls under the umbrella of alternative finance. To understand the differences between these two types of capital raising, let us delve into the advantages and disadvantages of each.

Equity crowdfunding - Benefits

Accessibility for startups and SMEs: 

Equity crowdfunding is also more easily accessible to small and medium-sized enterprises and startups than traditional capital raising, such as cost, red tape, terms, and simplicity of the transaction.

Openness to small and large investors: 

Openness to the public makes it possible to raise capital from anyone and even non-professional investors, broadening the catchment area and building the customer-investor.

Promotion and visibility: 

A well-structured crowdfunding campaign not only raises funds, but is a'marketing operation which increases brand awareness and enables the acquisition of new customers.

Validation: 

With equity crowdfunding, metrics and feedback on the validity of the proposed product or service are also collected.

Community involvement: 

Investors can become ambassadors of the project, contributing to its dissemination and creating a highly loyal community which is also an asset for subsequent operations of the company.

Offering different types of shares: 

Just by doing a Capital increase within an equity crowdfunding campaign it is possible to offer different types of shares linked to different rights and benefits, for example, the right to vote at the meeting and differentiated property rights.

Rubrication of quotas: 

With equity crowdfunding, it is possible to open the capital stock without putting the new members directly into captable, but rather through an alternative scheme of heading the shares, so that they can resell the shares without going through the notary.

Equity crowdfunding - Disadvantages:

Fragmented governance: 

The presence of many small investors can complicate corporate management if the company does not apply well-defined control tools to don't lose governance.

Transparency obligations: 

To attract investors, the company must disclose sensitive information, which can pose privacy and competition risks.

Risk of collection failure: 

If the minimum goal is not met, the entire operation is cancelled, resulting in wasted time and resources.

Challenging activity:

The operation requires the involvement of the entire company team and preparation that can take up a lot of time.

You can explore this topic further in our article on possible equity crowdfunding risks.

Traditional Capital Increase - Advantages:

Corporate stability: 

Current shareholders retain control, and strategic decisions are not influenced by an audience of small investors.

Access to substantial capital: 

Targeting institutional or professional investors makes it possible to target larger amounts of capital.

Circumscribed effort: 

It is an activity that involves only a small part of the corporate team.

Established procedures: 

Traditional capital increase is a well-known and regulated process with reduced legal and management risks.

Traditional capital increase-Disadvantages:

Limited target audience: 

The availability of existing members and the ability to attract large investors can narrow the pool considerably.

Reduced visibility: 

It is not a marketing operation and offers no opportunities for community promotion and engagement or customer acquisition, so it is a low-efficiency activity.

Market unknown:

The actual validation, if any, of the product or service will occur only after capital is raised, with market launch.

When to Choose Equity Crowdfunding 

The choice between equity crowdfunding and traditional capital increase depends on the characteristics of the company, its goals, and the resources available to it. 

L'equity crowdfunding may be the ideal choice in the following cases:

• Innovative startups or SMEs, i.e., companies that develop innovative solutions and want to increase their visibility as well as raise capital.
• Need for market validation: for a startup, a successful campaign can demonstrate real market interest in a product or service, providing a solid basis for launch, attraction of large investors (e.g., funds), or expansion.
• Projects with strong public appeal: companies with projects that are easily communicable and attractive to a large community of investors or to niches with high retention find crowdfunding a congenial solution.

L'Traditional capital increase may be the best choice in other cases:

• When it is essential to maintain a compact and stable corporate structure.
• When the company already has a network of professional investors or a strong relationship with existing partners.
• Fundraising for medium- to long-term projects, that is, when the capital needed is very large and the return on investment takes time, institutional investors are more inclined to support the company.

Equity crowdfunding and traditional capital increase represent two different avenues for financing business development, each with its own advantages and limitations. It should be remembered that the two solutions are not absolutely mutually exclusive: they can both be part of a long-term growth strategy, placing them at different stages of the company's life and enabling each other.

Conclusions

Equity Crowdfunding is a dynamic and innovative option, ideal for startups and SMEs that want to engage a large community of investors, increase visibility and validate their project in the market. However, it requires transparency, careful management of the membership, and effective communication to attract investors.

Traditional Capital Raising offers stability and control, with an established process that is better suited to more structured companies or those with an existing network of investors. It is less suitable for those seeking visibility and public involvement who also want to do a marketing operation.