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?
Equity crowdfunding, also called crowdinvesting, is a major trend in financing. In 2017, individuals and companies raised $2.5 billion through equity crowdfunding, according to the Statistics Portal. For several 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.
4. Equity Crowdfunding Platforms Only Profit When You Do
Unlike speculative oil and gas investments, equity crowdfunding platforms own a share, just like you. This means they aren’t compensated by how much they raise or whether a project is funded.
At EnergyFunders, we also get paid when you do. When most companies raise capital, they have access to those funds right after the money hits the bank account in the form of origination or promotion fees. We wanted to take it a step further to ensure that our investors’ interest is the same as our interest. We choose to receive payment when the project succeeds and investors receive payments.
What This Means for You
At EnergyFunders, our goal is the same as yours – getting projects to produce oil and gas. This gives us an even greater incentive to find the best quality oil and gas projects and to fight to make the projects successful.
Each project on our platform has been carefully vetted by our team, which includes background checks on operators, verifying references, conducting engineering reviews and more. You can be confident that we do everything possible to select the oil and gas projects with the best chance of turning a profit on your investment.
The tax advantages of oil and gas investing are good – but making profits from producing oil wells is even better. That’s why we align our interests with yours, so we share the same incentives, same goals and same successes.