Equity Crowdfunding for Investors: A Guide to Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms

CHAPTER 10

Equity Crowdfunding Securities

When you browse an equity crowdfunding site, you will see basic information about each offering: the name and location of the company, a description of the product or service, team profiles, the type of securities, and other confidential deal terms and disclosures. In Title III deals, the types of securities will be predominantly corporate stock (usually preferred shares), LLC membership units, and convertible debt (actually a hybrid of equity and debt).

We will explain the basics of preferred stock and LLC units first, as they are straight equity and are more common than convertible debt in angel investments. Convertible debt was used in less than 8 percent of investment rounds in which angel investors participated, according to a 2002 study at the University of Chicago's Booth School of Business.¹

STRAIGHT EQUITY: STOCK AND LLC UNITS

If you are new to private securities, your investment portfolio probably consists mainly of public company stocks (equity-based securities), corporate and municipal bonds (debt-based securities), and various mutual funds (bundles of public stocks and/or bonds). The public stocks in your portfolio are likely shares of common stock, rather than preferred stock, because common shares offer the potential to earn greater returns when the companies behind them are consistently profitable.

When a public company—usually a corporation—needs to raise capital, it must decide whether to borrow money or sell equity, or ...