Crowdfunding in a nutshell is the financing of projects by a large group of people, each of whom individually couldn’t or wouldn’t finance the entire project.
Crowdfunding can be as simple as when an entire community pitches in to help a family in need. The same concept applies nationally or globally when people raise funds for disaster response efforts.
Crowdfunding Meets Equity Investing
Equity crowdfunding means that the organizer of the crowdfunding campaign isn’t paid – they simply earn equity in the project.
When the Jumpstart Our Business Start-Ups Act of 2012 (the JOBS Act) became law, it required the SEC to lift the ban on general solicitations. This allowed online equity crowdfunding with accredited investors.
Some leaders in equity crowdfunding include the business startup financing firm FundersClub.com and the realty investment vehicle RealtyMogul.com.
Why Use Equity Crowdfunding for Oil Investing?
In 2017, individuals and companies raised $2.5 billion through equity crowdfunding, according to the Statistics Portal.
For three main reasons, oil and gas drilling projects make a good investment vehicle for crowdfunding-savvy investors.
1. Crowdfunding Allows Smaller Buy-ins and Larger ROIs
First, oil and gas projects offer much larger returns than startup, real estate or any other typical kind of investing. The drawback, historically, has been that oil and gas drilling projects require large buy-ins, which makes diversification difficult.
However, with crowdfunding, buy-ins are substantially lower. This allows investors to aim for returns much higher than other investments while diversifying across many wells to protect themselves from the risk of dry holes.
Crowdfunding essentially allows investors to execute the same diversification strategies as oil and gas companies do.
2. Existing Oil Contracts Can Accommodate Equity Crowdfunding
The oil and gas industry has historically relied on the joint operating agreement to include as many investors as possible.
EnergyFunders is an equity crowdfunding platform that crowdfunds the purchase of a working interest stake in a wellbore with a joint operating agreement.
The deal-making framework already exists, and equity crowdfunding simply accelerates the process. EnergyFunders also protects operators from having too many working interest partners because the working interest is owned in a block and not individually among the investors.
Our model requires operator consent to break the working interest block into smaller interests, gives operators preferential rights to purchase and does not divest the operator of his or her voting rights under the joint operating agreement.
3. Crowdfunded Deals Are More Transparent
Investors can benefit from a high degree of transparency when they have access to due diligence materials and when the platform only allows reputable operators to fund their projects.
Equity crowdfunding can eliminate the so-called “shady backroom deal” and provide thorough, expedited due diligence on a platform.
What This Means for You
Equity crowdfunding, also called crowdinvesting, is a major trend in financing that ensures that those organizing the crowdfunding deal are just as invested in making money as you are – after all, they don’t make money until all investors do. This makes sure that organizers align their interests with the investors’.
EnergyFunders uses equity crowdfunding to present transparent investments to investors. We only profit when you do, and we give you all the details about potential investments.