What You Need To Know About Investment Crowdfunding
The rise of investment crowdfunding in recent years has been one of the most interesting and potentially game-changing trends in the financial markets. With the help of this innovative approach to investing, there is a possibility that you may generate money from fledgling enterprises, growing companies, and even real estate in a manner that was not before feasible. However, before you commit money to investment crowdfunding, it is vital to examine the situation to determine if it is good for you — just like you would with any other form of investment. This is the same advice that would be given for any other type of investment.
What Exactly Is Crowdfunding for Investments?
You are familiar with the concept of crowdfunding. Sending money to someone in order to assist them in achieving a goal is known as “gifting.” It’s possible that they need the money for expensive medical care. It’s possible that you’re helping someone publish a book. It’s possible that the individual is in the process of developing a product, and that your support will enable them to launch a commercial endeavor. You send the money regardless of the cause, and you don’t anticipate anything back in return other than a thank-you message and perhaps an early sample of the product.
Investment crowdfunding, which is also frequently referred to as “equity” crowdsourcing, is distinct. In 2012, it was included in the bill that would become known as the Jumpstart Our Business Startups (JOBS) Act. The act required the Securities and Exchange Commission (SEC) to come up with rules for investment crowdfunding. This allowed for different regulations for startups and small and medium-sized businesses to raise capital without being hedged about by some of the red tape that comes with issuing shares and providing returns for stakeholders. The act also allowed for the Securities and Exchange Commission (SEC) to come up with rules for investment crowdfunding.
Even while there are still regulations and bureaucratic hurdles, investment crowdfunding makes it simpler for companies to seek funds by inviting people to participate in the process. At initially, participation was restricted to just those investors who have the appropriate credentials. The so-called Title III guidelines, however, made it possible for anybody to begin using platforms in 2016 with the purpose of investing in new businesses. You may now take one hundred dollars and use an online investment crowdfunding platform to make a financial commitment with the expectation of receiving a return on your investment.
How Do You Invest Using a Crowdfunding Website That Offers Equity?
Since the JOBS act was passed, a proliferation of websites that facilitate crowdsourcing has taken place. You may get access to new businesses just starting out or extending their operations via platforms like Wefunder, Kickfurther, and SeedInvest, among others. In order to join up, you will need to go through all of the same hoops that you would go through in order to sign up for any other investing website. You will require details about your personal identity as well as your financial accounts.
You are prepared to make investments after you have created an investment account with a reliable investment crowdfunding site and have obtained the necessary login information. There are different baseline requirements for each platform.
In any event, the amount that you will need to contribute is far lower than what you may have been required to put in other businesses of a similar kind in the past. Before the advent of investment crowdsourcing, one required millions of dollars to invest at the beginning of a business initiative in order to qualify as a venture capitalist or angel investor. Before the advent of real estate investment crowdfunding, it was possible that you would need between $100,000 and $2 million to join an investing club and have access to some of the projects that you are now able to buy into for a fraction of the original cost.
Before You Risk Your Money
Exactly like with any other kind of investment, you need to be sure that you carry out all of the necessary research. Since it is an investment, there is always the possibility that you might end up losing money.
Some of the platforms that enable you to invest in firms operate in a manner that is similar to that of websites that facilitate peer-to-peer lending. You make your investment during a round of fundraising, and you will be repaid for it once the firm begins to produce a profit. If the firm does not generate a profit or declares bankruptcy, it is possible that you may not get any reimbursement at all. There is a chance that you may lose all of your money.
Other factors to take into account are as follows:
- Which businesses are behind these websites? It is important to keep in mind that a significant number of these businesses have turned to investment crowdfunding platforms because they were unable to get finance from traditional sources, such as venture capitalists or small business loans. Although there is a possibility that you may discover a good option, or perhaps a unicorn, the fact of the matter is that it is quite unlikely that you will locate the next billion-dollar firm on any of these platforms.
- Can you withstand illiquidity? You are not free to withdraw your money whenever you choose. Buying and selling shares using an online broker is not the same as doing it with a conventional broker. You are required to wait until the firm begins paying payments out of its earnings before moving further. It is not possible to sell the asset at a loss in order to recover part of your lost cash.
- Do you fit the qualifications we’re looking for? The SEC will not just allow you to put everything at risk. You are eligible to invest up to the larger of $2,200 or 5 percent of the lesser of your yearly income or net worth if both of these numbers are less than $107,000. If one of these numbers is higher, you are not eligible to invest. If both your annual income and your net worth are higher than or equal to $107,000, you are allowed to invest up to 10 percent of either your annual income or your net worth, whichever is lower, but you cannot invest more than $107,000. Due to this restriction, there will be a certain number of prospective investors who will be unable to take part in the real estate crowdfunding platform.
Crowdfunding, often known as investment crowdfunding, provides opportunity to increase your wealth in non-traditional methods. However, before you go further, it is up to you to assess your current circumstances and choose whether or not you are willing to take the necessary level of risk.
The Balance does not provide any services or advice pertaining to taxes, investments, or finances of any kind. Because the information is being provided without taking into account the investment goals, risk tolerance, or financial circumstances of any particular person, it is possible that the material is not appropriate for all investors. The performance of the past does not guarantee the outcomes of the future. Investing in anything exposes you to the possibility of suffering a loss of principal.
- The legislation known as the Jumpstart Our Business Startups (JOBS) Act of 2012 established the legislative framework that makes it possible for businesses to obtain investors via the use of crowdfunding websites.
- There are laws in place that prohibit investors from contributing more than 5 percent of their yearly income to crowdfunding platforms (or $2,200 if 5 percent of their annual income is less than $2,200).
- Sites that facilitate investment crowdsourcing are analogous to sites that provide peer-to-peer lending.
- Crowdfund investors, in contrast to regular investors who use a brokerage account, do not have the ability to swap shares anytime they want to do so.