Have you ever watched a news story about a massive initial public offering (IPO) for a new tech company that made all of its investors millionaires overnight? The next thought that ran through your head was probably something like, “How come I never get in on the ground floor of deals like this?”
The simple answer is that you’re not a venture capitalist or an investor in a hedge fund that buys startups. Historically, they are the ones who get first dibs on those types of deals. Equity crowdfunding seeks to change that history by allowing everyday investors like you to get in on the ground floor of startups of all kinds.
What is Equity Crowdfunding?
Crowdfunding is a basic concept: Get a group of people together (a crowd) to fund an idea, a dream or even a business you want to start. People have been doing this for a long time. If you ever solicited money from your parents to match the money you raised to purchase a new car, you essentially crowdfunded your vehicle purchase.
Online platforms like Kickstarter took crowdfunding worldwide, which meant you could solicit people everywhere to invest in your project. It wasn’t long before aspiring business owners took notice and began posting crowdfunding opportunities for their own startups. With traditional crowdfunding platforms, the payoff was usually some sort of prize related to the business investors put money into. For example, a crowdfunded wine company might send a case of its finest vintage to investors if the funding goal was reached.
Equity crowdfunding works very differently. People who put money into an equity crowdfunding platform offering are literally buying an equity share in the company. That means the payoff for their crowdfunding investment will not be a reward or a bonus but an actual cash dividend. The amount of this dividend is based on the percentage of the company purchased by the investor.
You may be thinking this sounds just like buying stock in a company. It’s not. Yes, both stocks and equity crowdfunding sell percentages of companies, but they are subject to different regulatory requirements by the federal government. Most stock purchases in a private company require you to be an accredited investor (meaning you must have a certain net worth) and you can only purchase stocks from a trader who has been licensed by the Securities and Exchange Commission.
You can make an equity crowdfunding investment without the help of a licensed trader. What’s more, many equity crowdfunding platforms have offerings that are available to nonaccredited investors. The end effect of this is that equity crowdfunding opens up the game of equity investing to a whole new class of investors; specifically, investors like you!
Who Should Invest in Crowdfunding Platforms?
Equity crowdfunding investments are a great way for almost everyone to get in on the ground floor of some really unique, high-growth opportunities. One of the beauties of equity crowdfunding is that some platforms offer investments for as low as $100. That's why any investor who has some excess liquidity and wants to consider alternatives to buying stocks should take a look at equity crowdfunding. On top of all that, there is a wide variety of platforms that offer incredible diversity in investment opportunities.
Many equity crowdfunding platforms have offerings that may not strike the fancy of a big-time venture capitalist or hedge fund manager. This allows you to do a little “niche investing” into some projects or fields of personal interest for you. If you’re a wine enthusiast, for example, you might find an equity crowdfunding platform that allows you to buy an inexpensive share of a small vineyard. That’s an investment, but probably not the kind of investment your broker is going to call you with.
What Makes a Good Crowdfunding Platform?
The best crowdfunding platforms all have several things in common:
- Easy to navigate web page and user interface
- A great FAQ page
- Lots of customer resources (webinars, how to videos, breaking investment news)
- Lots of customer support (live chat, responsive to emails and inquiries)
- Transparency (clear fee structure and contract language)
- A wide variety of investments to choose from
- Ability to establish relationships and interact with the owners of startups
These are all signs of a well-managed, well-funded equity crowdfunding platform. Investors would be well advised to steer clear of platforms that don’t offer these things. After all, if they aren’t responsive to your initial inquiries, it’s likely their customer support staff is overworked and/or underpaid. In either case, it’s a red flag for you. The same goes for the web page. If it’s hard to navigate and you have trouble understanding it, the same will probably apply to their investments.
Should You Invest in Multiple Crowdfunding Platforms?
Absolutely! The low buy-ins and wide variety of offerings create a great opportunity for you to diversify your equity portfolio at an affordable cost. Make a list of several industries you’d like to invest in and budget how much money you’re prepared to invest in them.
You can scan different equity crowdfunding platforms to find investments for each of the industries on your list. This is really no different than diversifying your stock portfolio. It’s something every investor should do. Another bonus of equity crowdfunding is that since the shares are not sold by brokers, you don’t have broker fees. This is even more money that can go into diversifying your portfolio.
The Best Equity Crowdfunding Platforms
If you’re considering an equity crowdfunding investment, you may want to check out this breakdown of Benzinga’s favorite platforms.
- Best ForAccredited Investors
- Best ForSmall Account Real Estate Investing
- Best ForLow Cost Real Estate Investing
- Best ForNewer accredited investors
Is Crowdfunding Right for You?
For as long as people have been investing, everyday investors have lamented about their inability to get in early on the big bonanzas. Sure, they could watch a company grow and aggressively buy when the initial public offering was made, but even then, the lion’s share of the profits went to the venture capitalists who bought equity well in advance of the IPO.
It may have felt like a bit of a conspiracy but it wasn’t. Federal regulations and accreditation requirements effectively reserved a place at the table for only the most well-off and well-connected investors. The ultimate goal of equity crowdfunding is to help investors break through that barrier. If you’ve been thinking about investing, but a lack of big money or accreditation has been holding you back, an equity crowdfunding investment might just be the perfect thing for you.
Can you make money investing in crowdfunding?
Yes, you certainly can. However, whether you make money in crowdfunding depends on several factors. The first of which is what kind of crowdfunding you’re doing. The crowdfunding on traditional platforms like Kickstarter pays a bonus to investors, but doesn’t necessarily pay dividends.
Equity crowdfunding on the other hand, allows you to buy equity in start-up businesses, which will allow you to claim a percentage of the net profits if the company makes money. That is, of course, the second factor. You can’t make money crowdfunding if the company (or companies) you invest in don’t make money themselves, so choose wisely.
Do you pay back crowdfunding?
No, because crowdfunding is not a loan. When you raise money through crowdfunding, you’re offering your investors one of two things: In a traditional crowdfunding platform you typically offer a non-financial, but still tangible bonus to your investors (such as a year’s supply of the product you sell) if you reach your funding goal. In equity crowdfunding, you’re selling a share of your business to the investor, which in effect makes you partners.
You don’t pay them back their investment plus interest as you would in a loan. Instead, you share your profits with them based on the percentage of equity you’ve sold them in your company. So, if an investor buys a 30% share in your company through an equity crowdfunding platform for $5,000 investment, and your company nets $100,000 in profits, you pay them $30,000 as opposed to $5,000 plus interest.
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