The term Web3 refers to the next generation of the internet, where applications are built on top of blockchain networks and smart contracts. Greater introduction of blockchain technology in the Web3 equity crowdfunding model has the potential to make a significant impact by offering several advantages.
Blockchain benefits for equity crowdfunding
Increased Transparency and Security
Transactions would be recorded on a secure, tamper-proof ledger, making it easier to track ownership and reducing the risk of fraud. Due Diligence findings, as an example, would be available to all potential investors, who could have more confidence in the legitimacy of offerings and the accuracy of records.
Enhanced Efficiency, Automation and Investor Protection
Smart contracts, which are self-executing agreements stored on the blockchain, can automate tasks like shareholder recordkeeping, dividend distribution, and voting rights management. This reduces administrative burdens and costs for both companies and investors.
At the same time, they can enforce the terms and conditions of a crowdfunding round, such as the goal, the deadline, the rewards, and – if applicable – the refunds.
It would be possible to take measures to protect retail backers’ investments (retail investors act on a personal basis with their own money). Their money could be held in escrow and made available in tranches to the businesses they invested in using crowdfunding, with smart contract arrangements linked to key performance indicators. If a business found itself in trouble, or the founder(s) were taking it in a different direction, payments to it would cease and the investors could have at least some part of their investments returned. A company that decides to pivot would have to re-convince its investors about its new direction.
Improved Liquidity
The growth of secondary markets is increasingly eroding the previous illiquidity of shares in privately-owned businesses. Going further, blockchain-based tokens (NFTs) representing shares can be more easily traded on secondary markets compared to traditional private company shares. This allows investors to exit their positions more readily, and at lower cost, potentially increasing liquidity for the overall market.
Globalized Investment Pool
Blockchain removes geographic barriers, allowing companies to tap into a wider pool of international investors without limitations of traditional financial systems. On Web3-based equity crowdfunding platforms, retail investors will find it easier, faster and lower cost to build a more diverse range of investments by backing startups in a number of countries.
Reasons for caution
Equity crowdfunding on Web2 platforms can be done with just a smartphone and a payment card
Not all retail investors are familiar with blockchain technology, potentially limiting participation in the early stages. Some are only just beginning to use equity crowdfunding, and to have to adapt to blockchain-based shares as NFTs, and investments paid in tokens or cryptocurrency, could make it a too demanding user experience. As well as company values changing, the volatility of crypto and tokens add another layer of complexity and risk to Web3 equity crowdfunding.
Equity crowdfunding platforms are commonly regulated, such as by the SEC in the United States and the FCA in the UK. Cryptocurrencies are not. Regulations surrounding blockchain-based securities offerings are still under development, creating uncertainty for businesses seeking to utilize this method, and adding a layer of risk to retail investors.
In practical terms, developing and integrating blockchain technology requires a level of technical expertise which could be a hurdle for smaller businesses. Also, current blockchain platforms might not be able to handle the high volume of transactions associated with large crowdfunding campaigns.
It would perhaps be reassuring to see some established equity crowdfunding platforms, such as Crowdcube and Seedrs in the UK, and the top equity platforms in North America (Republic, Wefunder and StartEngine), incorporate using blockchain first. The European Crowdfunding Market Report 2023 found that asset tokenization – a prerequisite of adopting blockchain technology – was in the R&D pipeline of just 18% of equity platforms.
Otherwise, retail investors and businesses looking to operate with Web 3 equity crowdfunding benefits are faced with unfamiliar tech used by relatively unfamiliar and less relevant crowdfunding platforms, which include:
- Gitcoin, a decentralized crypto exchange that also has a grants program
- Giveth, which funds non-profits and worthy causes
- PoolTogether, a defi startup that has had to crowdfund its own legal defense against a lawsuit
- MintFund, which aims to onboard global creatives to mint their first NFTs
It could be tough to sell.
Key takeaways
In summary, integrating Web3 equity crowdfunding with blockchain offers a promising path towards a more efficient, secure, and accessible investment landscape. However, addressing regulatory concerns, improving scalability, and fostering investor education are crucial for its widespread adoption.
Are there other benefits of crowdfunding built on Web 3-based blockchain technology that you’d like to share with us?
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