Think Carefully Before Getting Into Crowdfunding Investing
Small investors will soon have the opportunity to take part in crowdfunding investing by buying shares in small companies and startups through fundraising portals online. Before this, these types of shares were sold only to investors with a net worth of over $1 million or with an annual income of over $200,000 and both needed a comprehensive knowledge of startup companies.
Regulators and observers of the investing system are worried about the impact of these investments because they are inherently risky and could result in losses for the small investors who don’t know how to navigate the complex start-up market. Since more than half of all start-ups fail, it is safe to assume that half of these crowdfunding investments will fail as well costing these small investors their money.
There are some guidelines that small investors can follow as they look for crowdfunding investing opportunities:
Be aware of fraud. With something this big and this new, there is a very significant potential for fraud. The number of websites with crowdfund in their domain names has skyrocketed and continues to grow and most of these are shell structures awaiting final regulations.
The concept of crowdfunding investing is going to be hard to police. Even the SEC admits that as more and more investors buy in, the number of startups will grow and so will the number of crowdfunds and so on. The ability to oversee the compliance, regulatory and auditing aspects of these types of investing and fundraising mechanisms will sorely test the SEC’s ability. Even while Congress wants to push through the regulations, they have provided no additional funding to the SEC to provide oversight.
Research before investing. By and large, the average small investor should not invest in most of these types of investments. They are risky and the chances of losing everything is very, very high. If a small investor chooses to do this type of investment, there are a few ways to increase their potential for success:
Use a broker dealer. Crowdfunded startups are very complex investments and hard to understand. Researching the investment means understanding the company’s management, business strategy, capital plans, and competitors. It’s possible to get some of that information from the offering documents, prospectus or their SEC filings. A broker dealer can provide guidance on which potential investment is a better risk than another.
Spread the risk. Some of these investments are much riskier than others, so it is a good idea to spread the risk around to more than one company. It’s also a good idea that an investor only invest money they are willing to lose, because there is a distinct possibility that they will.
These are long-term investments. It may be quite a while before a startup goes public and any shares can be sold and money made. An investor should be prepared to wait quite a while to earn their money back, not to mention see any profit.
Choose local companies. With crowdfunding investing, the investors typically get all their information from the company and it is much easier to communicate with a company that is in their local area. It is also easier for a small investor to keep track of a company’s growth if the company is in their backyard.
Crowdfunding investing is certainly a new investing opportunity for small investors, but it needs to be done with extreme care and much research. It is not something to be done without a lot of careful thought.