What is equity crowdfunding?
Equity crowdfunding (ECF) is a brand-new way to invest online. If you’re familiar with Kickstarter, a site where groups can raise funds for almost any type of project or business, it’s similar to that. The main difference is that on sites like Kickstarter, the reward for contributing is in the form of giveaways like T-shirts, tickets, etc. Equity crowdfunding is different in that investors buy shares of the company seeking funds.
Current law allows accredited investors (those with income of $200,000 per year individually, or $300,000 with a spouse) to invest in a wide range of private equity offerings online. Once the SEC finalizes the rules, the recently passed JOBS Act will also allow non-accredited investors (those who don’t qualify as accredited) to invest in startups online.
How much money do I need to get started?
Once the SEC finalizes regulations for equity crowdfunding (ECF), non-accredited investors may be able to invest as little as $100 in startups. Accredited investors can put as little as $1,000 in most deals, depending on the platform.
Is there a maximum amount I can invest?
If you make less than $100,000 per year, you will be able to invest up to 5% of your income in non-accredited ECF deals. Investors who make over $100,000 can put up to 10% of their income into such offerings. Note: The enabling regulations have not been finalized by the SEC and are subject to change.
How do I eventually sell my shares?
It depends on the portal, or site, you choose to invest on. Some choose when to sell for you, while others let you choose an exit strategy of your own. You should take into account that this market has limited liquidity compared to publicly traded stocks. You may very well not be able to sell when you want to. This is a fast-evolving aspect of ECF, so do your research and be sure to read the fine print.
How risky is equity crowdfunding?
Investing in startups is inherently risky. A majority of companies will not succeed. But the potential rewards are considerable. For the first time in 80 years, accredited and non-accredited investors get the chance to invest on the ground floor, when the upside is much bigger than later on.
With proper research and a suitably large portfolio (we recommend at least 15 holdings), investors have a real opportunity to generate returns that do not depend on the fortunes of the big American stock markets. It’s a historic opening up for both retail investors and new companies.
How do I know if a company is legitimate?
Our universe of companies is not all startups. We will be considering only the startups posted on one of the dozen or so portals dedicated to early equity investing. Most of these portals have lawyers on staff to make sure the companies they list are compliant with all SEC regulations. It’s possible a bad apple could slip through the cracks. So you have the ultimate responsibility in making sure a company is 100% legitimate. But these portals do most of the heavy lifting in screening startups. They know that just one scam could ruin their reputation.
How do I know which companies to invest in?
This is a big question. We’ll give you the short answer here.
Of course, you can never know for sure if you’ve made the right choice. But the general rule is, the more research you do, the better are your odds of making a winning selection.
Also stick to what you know. So if you like a business plan, it actually means something. Find out as much as possible about management and their business history. Does the technology or product or service provide a benefit people actually want? Make sure you’re comfortable with the terms of the offering. Valuation is subjective, but it should be in the ballpark of what you think is reasonable. How much of the company’s equity will you receive in exchange for your investment? Read the small-print stipulations so you’re not caught by surprise later on by something the company does or doesn’t do. Most important, like the story but don’t fall head over heels in love with it. A company’s story is fictional, for your purposes.
It hasn’t happened yet. It may never happen.
We believe in making deeply informed investment decisions. To that end, we have a dedicated team of four full-time research professionals who will be reviewing deals as they become available. Backing up our team is an impressive Board of Advisers. It boasts a wealth of experience and expertise in many of the fastest-growing sectors of the economy. The board will play an instrumental role in screening deals put forth by the research team.