Thanks to the implementation of Title III rules from the Jumpstart Our Business Startups Act, equity crowdfunding is a thing for everyone. Are you ready to be a VC?
Many of us have dreams of making the right investment at the right time and getting in on the ground floor of the Next Big Thing in the startup world. However, when it gets right down to it, that's not something many of us have access to. What are the chances that you will be able to come up with hundreds of thousands of dollars — or millions of dollars — to invest in a hot new company?
With the introduction of equity crowdfunding, things started changing. A few years ago, the Jumpstart Our Business Startups Act (JOBS Act) was passed by Congress and signed into law by President Obama. Since then, different phases have allowed companies to raise money through crowdfunding. However, during the first phase, only accredited investors were able to take advantage of this new form of investing.
Today, May 16, 2016, marks a change in equity crowdfunding. Today,?anyone can use various platforms to get in on the ground floor with a startup, or even to participate in real estate investing or hedge fund investing. It gives ordinary people the chance to be VCs. But is this really the right move for you and your money?
Equity Crowdfunding vs. “Traditional” Crowdfunding
Crowdfunding hasn't been around for all that long. Sure, we've been able to go to our friends and family for help, but the crowdfunding “industry” really took off as the Internet and social media made it easy to ask for help from far-flung acquaintances and even from strangers. I even used a crowdfunding campaign to fund the publication of my book, and many others use these platforms to obtain funding for their businesses.
However, this type of “traditional” crowdfunding isn't the same as investing. You give your money to someone looking for a thank-you?perk. You don't actually get shares in the company. Equity crowdfunding changes all that.
With equity crowdfunding, a company can look attempt to raise funds from scores (or even hundreds) of investors without the need to try to secure one large amount from a venture capitalist or angel investor. The investors actually get a stake in the company with equity crowdfunding, and a chance to earn a big return if the company actually becomes quite successful.
The rules?have been phased in gradually, and there are limitations on how businesses can raise money, as well as rules governing?business disclosures. After restricting investment like this to those with the resources that the SEC considers substantial enough to handle the risk, equity crowdfunding is now open to everyone. This can provide you with the chance to get in on the ground floor and follow a success story all the way to the top.
But, as with so many things related to money, investing, and life, just because you?can do something doesn't mean that you?should.
Is Equity Crowdfunding Right for You?
Before you rush out and join the first equity crowdfunding platform you can, it's important to think through some of the realities that come with taking this sort of risk:
- Bigger chance of loss? Anytime you can get in on the ground floor of something big, you have the chance for big gains. However, the bigger the chance for games, the bigger the risk of loss. When?you start investing, you run the risk of loss. But some investments come with a bigger risk of loss than others. Before you invest your money, you need to make sure you can afford to lose it.
- What companies will you find? With traditional crowdfunding, it can be fun to be a part of something interesting. However, you give money knowing you won't get that back. You might get a gift, but you don't expect your money back. This new investment crowdfunding changes that. You expect your money back plus a return. But what kinds of companies will be on these platforms? You're looking at companies that didn't have the connections (or maybe even the best ideas) to attract bigger VCs or angel investors. Are you sure you can pick a winner that others overlooked?
- Do you understand how startup investing works? There are some things that long-time startup investors understand that regular folks may not get. It's one thing to get started with an index ETF when you have little knowledge of investing, and quite another to evaluate startups and SMBs looking for expansion. It's always better to know a little bit about how to approach your investment and create a strategy than to blunder around. Anyone can pretty much figure out how to get an all-market index ETF to work properly. Understanding startup investing is a different animal, and those who know what they are doing will still have an advantage.
- Are you ready for illiquidity? Understand that this type of investing is illiquid. You can't just pull your money out when you want. Instead, you have to wait until the company is ready to repay with returns. Some platforms claim that you can get 10% to 12% returns (or more!) without the need to go through Wall Street. And you probably can — if you pick the right company to invest in. But while you wait for your returns, you won't be able to withdraw the money if something else comes up.
Also, it's important to realize that the SEC isn't just letting those without sufficient assets risk however much the want. If you make less than $100,000 per year, you can only invest $2,000 or 5% of your annual income, whichever is greater. If you make more than $100,000 per year and less than $200,000 per year, you can only invest up to 10% of your income. The SEC is trying to do what it can to protect inexperienced investors from losing?too much when it comes to equity crowdfunding.
Equity crowdfunding has the potential to change the way we invest, and further democratize investing. However, that doesn't mean you should jump in with both feet. Carefully consider whether you have the available funds to invest in something a little riskier, and plan to use any of these investments as a part of a wider portfolio with other, more liquid investments.
Over the next few months, I'll be trying out one crowdfunding platform, Kickfurther. They have provided me with $60 to give it a try. I'll return and report after I've given it a try.