What You Should Be Aware Of Concerning Online Crowdfunding Investments

What You Should Be Aware Of Concerning Online Crowdfunding Investments

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, expanding companies, and even real estate in a way that was not before feasible. However, before you commit money to investment crowdfunding, it is important to evaluate the situation to determine whether it is right for you, just as you would with any other type of investment. This is the same process that you would go through to determine whether a traditional investment is right for you.

Key Takeaways

  • The Jumpstart Our Business Startups (JOBS) Act of 2012 set up the legal framework that lets businesses use crowdfunding websites to find investors.
  • 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 whenever they choose to do so.

What Exactly Is Investment Crowdfunding?

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 treatment. 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 possibly 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 tapes that come with issuing shares and providing returns for stakeholders. The act also allowed the Securities and Exchange Commission (SEC) to come up with rules for investment crowdfunding.

Even though there are still regulations and bureaucratic hurdles, investment crowdfunding makes it simpler for companies to raise funds by inviting people to participate in the process. At first, participation was restricted to only investors with 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 can now take $100 and use an online investment crowdfunding platform to make a financial commitment with the hope of getting your money back.

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 can gain access to new businesses just starting out or extending their operations through platforms like Wefunder, Kickfurther, and SeedInvest, among others. In order to sign 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 investment website. You will require details about your personal identity as well as your financial accounts.

You are prepared to make investments once you have opened an investment account with a reliable investment crowdfunding platform and have obtained the necessary login information. There are different baseline requirements for each platform.

In any event, the amount you will need to contribute is significantly lower than what you might have been required to invest in other businesses of a similar nature in the past. Before the advent of investment crowdsourcing, one needed 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 gain access to some of the projects that you are now able to buy into for a fraction of the original cost.

Before you put your money at risk

Just like with any other type of investment, you must ensure that you carry out all of the necessary research. Since it is an investment, there is always the possibility that you could end up losing money.

Some of the platforms that enable you to invest in firms operate in a manner that is analogous to that of websites that facilitate peer-to-peer lending. You make your investment during a round of funding, and you will be repaid for it once the company begins to produce a profit. If the company does not generate a profit or declares bankruptcy, it is possible that you will not receive any reimbursement at all. There is a chance that you will lose all of your money.

Other things 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 websites because they were unable to secure financing from traditional sources, such as venture capitalists or small business loans. Even though you might find a good option or even a unicorn, it is very unlikely that you will find the next billion-dollar company on any of these platforms.

Can you withstand illiquidity? 

You are not free to withdraw your money whenever you like. 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 company begins making payments out of its profits before moving forward. It is not possible to sell the asset at a loss in order to recover some of your lost capital.

Do you fit the requirements we’re looking for? 

The SEC will not just allow you to put everything at risk. If both of these figures are less than $107,000, you can invest up to the greater of $2,200 or 5% of the lesser of your yearly income or net worth. If one of these numbers is higher, you are not eligible to invest. If both your annual income and net worth are greater than or equal to $107,000, you may invest up to 10% of either your annual income or net worth, whichever is less, but not more than $107,000. Because of this rule, a certain number of people who want to invest won’t be able to use the real estate crowdfunding platform.

Crowdfunding, often known as investment crowdfunding, provides an opportunity to increase your wealth in non-traditional ways. However, before you move forward, it is up to you to assess your current circumstances and determine whether or not you are willing to accept the associated level of risk.

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