The concept of crowdfunding dates back hundreds of years, when Jonathan Swift had the idea to give micro loans to low-income families in Ireland.
Modern technology has taken this funding approach to another level. Today, a growing percentage of crowdfunding takes place via online platforms – even for equity investments.
Choosing the Right Equity Crowdfunding Platform
There has been a paradigm shift in the investing world.
Investment opportunities are moving online, and only more will follow as technologies evolve. The question is: how can you capitalize on this development and see the highest possible returns?
Equity crowdfunding can help you save time by connecting you with a wide range of offerings – all from the convenience of a centralized portal. This makes it easier to quickly review opportunities and diversify your investments.
Choosing with the right portal, however, allows you to do much more than that. It leads to smarter investments.
Most equity crowdfunding portals play a passive role in connecting opportunities to potential investors. But putting up a 12-page slide deck, without thorough vetting or disclosed information, isn’t enough to make informed investment decisions.
Every portal claims to have great deal flow and vetted opportunities, but it’s how these deals are sourced and vetted that has the greatest impact on your ROI.
This might seem like a big departure for investors used to more traditional arrangements. So let’s discuss some of the key questions potential equity investors should address before moving forward:
“How Do I Invest?”
Embracing online equity crowdfunding requires investors to choose a platform through which to connect with suitable investment opportunities.
Numerous considerations come into play, including: 1) your ideal level of investment, 2) which stage companies you prefer to focus on, and 3) whether you’re targeting a broad portfolio of opportunities or a specific niche.
Once you decide on a platform, it’s just a matter of providing the information they need to meet their vetting requirements. Then you will be registered on the platform and can stay apprised of new opportunities.
“How Much Money Do I Need to Invest?”
The minimum threshold investment varies by platform. Minimums ranging from $500 to $1,000 are common. Some platforms allow the listing companies to set their own investment requirements for offerings.
Under the JOBS Act, unaccredited investors who earn less than $100,000 a year are only able to invest the lesser of: 1) $5,000 or 2) 5% of their annual income or net worth. Unaccredited investors who earn between $100,000 and $200,000 per year can invest the lesser of: 1) $10,000, or 2) 10% of their annual income or net worth.
“How Do I Know If I Qualify?”
Investor qualification requirements vary by crowdfunding platform.
For many potential equity investors, accreditation (in the eyes of the SEC) remains a significant roadblock. “Accredited investors” are:
Individuals with an annual income exceeding $200,000,
Individuals with at least $1 million net worth, or
Entities with over $5 million in assets.
Title IV of the JOBS ACT allows non-accredited investors to participate in equity crowdfunding, but many platforms remain closed to the general public. Some have minimum investment amounts which are out of reach for most non-accredited investors. Others choose to restrict access to savvy investors, using accredited status as a marker for knowledge and experience.
When in doubt, check with the platform. You’ll have to provide identity, income, and asset verification to register and participate in listed companies’ funded rounds.
“Which Other Investors Have Scored Huge Returns?”
Equity crowdfunding is still an emerging industry, and it can take years to realize returns. With that said, here are just a few investors who have already made successful exits:
5 CUPS and Some Sugar. This tea company raised over 300,000 euros on the German crowdfunding platform Companisto in 2013. Less than two years later, the company decided to buy back the equity crowdfunded shares for 436,000 euros. The investors accepted, earning a 45 percent return.
ReWalk Robotics. This company raised over $3.3 million via the crowd before going public on NASDAQ in late 2014. OurCrowd didn’t specify the exact return, but AltFi estimates investors saw a return of over five and a half times their original investment.
Search in MENA. In 2004, this B2B online marketplace from Dubai raised $140,000 on Eurecca. When the company bought back the shares, investors exited with a profit of 150%.
“How Long Has Equity Crowdfunding Been Going On?”
Online crowdfunding started to gain traction in 2003, with rewards-based platforms (like Kickstarter and ArtistShare) leading the way. Over time, the funding model expanded to other applications – like debt-financing and donations.
Equity crowdfunding took off in the United States in 2011. A year later, the passage of the JOBS Act ensured equity crowdfunding’s place in the future by creating a legal framework. The number of equity crowdfunded platforms has since exploded.
“What Fees Are There?”
Fees also depend on the platform.
Most equity crowdfunding platforms earn the bulk of their income from fees charged to listed entities – not investors. However, investors in multi-company funds sometimes have to pay annual management fees.
Make sure to check with your potential partner about their fee structure before moving forward.
“How Is Equity Crowdfunding Regulated?”
The JOBS Act (passed in 2012) left it up to the Securities and Exchange Commission to regulate equity crowdfunding portals. After much longer than anticipated, the SEC finally adopted a set of rules in late 2015.
These rules require companies to make disclosures about the legal and financial health of their company prior to seeking equity investments. Because securities are involved, businesses that misrepresent or commit fraud are liable to civil and possibly criminal penalties.
“How Much Money Has Been Raised on the Platform?”
Past behavior is the best indicator of future results. There’s nothing quite like a proven track record to instill confidence in an equity crowdfunding platform.
As this is an emerging industry, many platforms are new. Yet it makes more business sense to trust experienced platforms – those which have already attracted investors and delivered healthy returns – than gamble with an unproven platform.
“How Many Companies Have Raised Funds?”
Many equity crowdfunding platforms emphasize substantial “deal flow” in an effort to attract investors.
In this case, quantity doesn’t trump quality. Platforms that limit themselves to fewer deals screen them more thoroughly. This frees up time and resources for individual attention for every deal in their pipeline. Investors end up with better opportunities – and higher ROIs.
The percentage of deals which have successfully met their funding targets is far more important than the overall number of deals themselves.
“Does the Executive Team Have a Background in Crowdfunding or Venture Capital?”
With online equity crowdfunding, the mechanics of raising capital are different than going from VC firm to VC firm and making individual pitches. Yet key investment concepts – like dilution, capitalization strategy, and exit plans – remain the same.
That’s why it’s so helpful to have people on your platform with crowdfunding and VC experience. Those with these right skill-sets have a better idea of what it takes to make an investment opportunity successful.
The result? You end up with better opportunities, and weaker investments are weeded out the moment someone at the platform spots a red flag. This helps ensure access to superior quality investments.
“Does the Platform Invest Its Own Capital in Portfolio Offerings?”
Some platforms, like ours here at CapValue, invest a chunk of their own capital in portfolio offerings.
A willingness to “put your money where your mouth is” shows more confidence than the slickest sales pitches. Platforms that invest have a close interest in seeing opportunities succeed – just like you do – because their own money is on the line.
This makes these platforms even more likely to screen out mediocre offerings. They won’t offer potential investors anything they wouldn’t consider themselves.
“What’s the Level of Reporting?”
The better prepared the issuing companies, the more confidence you can feel when investing. Look for portals that display information far beyond the bare minimum to comply with the law and ensure the most transparent transactions possible.
Robust reporting leads to transparency. And transparency leads to the most accurate assessments of every opportunity.