IPO Stocks vs Equity Crowdfunding: Key Pros and Cons
Aided by new technological developments and a global trend toward decentralisation, equity crowdfunding has risen to be a square alternative to traditional IPO (Initial Public Offering) investments in recent years. A reasonably recent Forbes article notes how venture capitalists are now turning to [equity] crowdfunding to fund their projects, despite it “being a competing money source for their portfolio companies.
It is not too difficult to imagine why. At their core, IPOs and equity crowdfunding are fundamentally the same: in return for a monetary investment, you are offered shares or stakeholdership over a private company. However, equity crowdfunding offers new conveniences that were not traditionally afforded by IPOs, such as giving more people access to investment opportunities and better returns due to less government oversight, among other things.
However, it is naïve to think that equity crowdfunding is objectively better, or that it does not have any downsides. IPOs, for example, are still viewed as THE ‘venture capitalist-approved’ method of finance by the majority of accredited/experienced investors, which makes IPO stocks more secure.
Whether you are looking to invest or launch a funding campaign for your company, you might want to take a look at the following advantages and drawbacks before picking one or the other as your financing method of choice:
Venture-Capitalist Backed. The majority of venture capitalists and accredited investors still look to IPOs as their main avenue for investments. Because of the high bar of entry involved in IPO investments, IPOs are thoroughly assessed by venture capitalists for their security and viability, similar to peer-reviews in academic circles.
High Liquidity. IPOs tend to offer better flexibility when it comes to the terms of your investment. If you want to gain quick returns for your investment, investing in highly liquid IPO stocks are better suited for you.
Financial Security. IPOs are run by companies that are more or less financially stable and want to go public motivated by one reason or another. This means that a return on your investment – however small – is almost always guaranteed.
High Bar of Entry. Not everyone can invest in IPOs. In the EU, to be recognised as an experienced or elective professional client, a company must have a substantial financial instrument portfolio, in addition to the massive trade transaction size requirement (50000€) on its respective market.
Larger Capital for Entry. Depending on the company, IPO shares can be very expensive. In some instances, brokerage firms will require you to have a particular amount of money/transactions before you can join an IPO.
More Regulatory Oversight. IPOs are listed on stock exchange indexes, which are the subject of critical review from investors and regulatory bodies alike.
Lower Overhead. As a rule, companies that are equity crowdfunded are not listed on any stock exchange and are therefore not obligated to comply with perpetual reporting requirements. This means savings that can be passed on to the investor. Which means – better rewards.
Better Rewards. The average equity crowdfunded project offers objectively better returns than the typical IPO. While equity crowdfunding campaigns are not as liquid as IPOs, they usually offer interest rates and very reasonable terms, which means higher profit for investors.
Lower Investment Minimums. Unlike IPOs, almost anybody who believes in a project can invest in an equity crowdfunding campaign, and the bar of entry is usually lowered down to just the campaigns investment minimum.
High-Risk investments. Because equity crowdfunding campaigns enjoy less oversight, the majority of companies that use them are either start-ups or growth-stage businesses. These do not have much capital to work with and are, as such, less stable than the type of companies that you would find on IPOs.
Bad diversification. On the investor side of things, bad diversification seems to be a fairly common problem. Since the bar of entry is so low, the majority of equity crowdfunding investors are inexperienced when it comes to properly diversifying their portfolios. This causes them to lose money on what experienced investors would otherwise call ill-advised investments.
Complicated to manage. While managing your equity crowdfunding campaign is straightforward enough, things can get quickly complicated when you factor in the fact that the majority of investors are inexperienced and tend to have unrealistic expectations about the process.
The bottom line is that choosing between IPOs and equity crowdfunding is not as simple as choosing hats. You have to count the cost and consider which advantages will work best with your campaign and company, and which cons are more manageable from your end of the business. Having full knowledge of your context and your means can help you narrow the choice down to one or the other – or if it’s feasible for you, both.