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Equity Crowdfunding (ECF)
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How ECF Differs from VC, P2P, and Shariah-Compliant ECF
Other types of crowdfunding include reward-based crowdfunding, donation-based crowdfunding, and debt-based crowdfunding. However, three common types of crowdfunding for startups and businesses are venture capital (VC), peer-to-peer (P2P), and shariah-compliant equity crowdfunding (ECF):
- Venture Capital (VC): Investment from professional investors who provide funding in exchange for equity in the company.
- Peer-to-peer (P2P): Raising funds from individuals via an online platform.
- Shariah-compliant Equity Crowdfunding: A type of P2P crowdfunding that follows Islamic principles and guidelines.
Differences between ECF, VC and P2P
Here are the differences between ECF (Equity Crowdfunding), VC (Venture Capital), and P2P (Peer-to-Peer) lending are:
| Differences | Equity Crowdfunding (ECF) | Venture Capital (VC) | Peer-to-Peer Lending (P2P) |
|---|---|---|---|
| Ownership | Investors receive ownership in the company they invest in | Investors lend money to individuals or businesses without acquiring ownership | Venture capitalist invests in exchange for a percentage of ownership in the company |
| Regulation | Regulated by financial regulatory bodies | Regulated by financial regulatory bodies | Not regulated by financial regulatory bodies |
| Investment Amount | Involve larger investment amounts | Involve larger investment amounts | Involve smaller investment amounts |
| Risks | Involve higher risk because investing in early-stage companies, which have a higher risk of failure | Involve higher risk as borrowers may default on their loans | Investing in companies that have already proven their business model and have a track record of success |
| Control | Have less control over their investments | Have less control over their investments | Have a seat on the board of directors and can influence strategic decisions |
| Exit Strategy | Have a longer time horizon for returns as may need to wait several years before the company goes public or is acquired for them to realize a return on their investment | Have a longer time horizon for returns and receive regular interest payments and principal repayment over the life of the loan | Exit their investments within 3-7 years through an IPO or acquisition |
Differences between Conventional ECF and Shariah-Compliant ECF
Here are the differences between conventional ECF and shariah compliant ECF are:
| Differences | Conventional Equity Crowdfunding (ECF) | Shariah-Compliant Equity Crowdfunding (ECF) |
|---|---|---|
| Compliance with Islamic principles | No | Follows the principles of Shariah, which prohibits investments in certain industries such as alcohol, gambling, and interest-based finance, among others |
| Screening process | Does not involve a screening process based on religious or ethical principles | Involves a screening process to ensure that the investment opportunity complies with Shariah principles |
| Contractual arrangements | Involves equity investments, loans, or convertible notes | Involves the use of specific contractual arrangements, such as Mudarabah and Wakalah, which comply with Shariah principles |
| Type of business | Any type of businesses | Only companies with shariah compliant business and/or activities |
| Issuance of shares | Ordinary Shares or Preference Shares | Ordinary Shares or Preference Shares |
| Usage of capital | Capital raised can be used accordingly to the entities | Capital raised through the fundraising campaign can only be used for shariah compliant purposes |