Chances are, you have heard of fundraising platforms like Kickstarter and Indiegogo. These platforms allow you to fund businesses and other ventures you think are worthwhile and have the potential to be successful. However, when you contribute money through one of these crowdfunding platforms, you aren't making a true investment. Instead, you are making a donation.
You might receive a “thank you” gift in return for your generosity, but there is no potential for ownership in a fledgling company, and you aren't going to see a long-term financial benefit.
Of course, there are ways to invest in start-up companies and see potential returns. Unfortunately, you need a great deal of capital in order to make this work.
Venture capitalists and angel investors have huge amounts of money at their disposal, and most of those with assets of less than a few million dollars can't invest on this level.
This is where securities crowdfunding has the potential to change the way you invest. For those who wish they could get in on the ground floor with a company, or who wish they could take advantage of opportunities offered by small to medium sized businesses in the process of expanding, securities crowdfunding offers new chances and new opportunities.
What is Securities Crowdfunding?
All the rage in recent years has been related to crowdfunding. Whether you are trying to raise money with the help of P2P loans, or whether you want to raise money to build a prototype of a product you think will be the Next Big Thing, it's all about tapping into the power of crowds for funding.
If enough people give a small amount of money, businesses can raise money to reach their goals without the need to woo one big investor. Securities crowdfunding makes it possible to move this social funding out of the realm of “donations” and into the realm of true investing.
Investors would be able to buy chunks of companies that meet certain requirements, allowing them to become shareholders in the companies. As a result of securities crowdfunding, more investors would have access to private securities, as well as what amounts to IPOs of start-up companies.
Down the road, you could benefit from stock sales and enjoy many of the benefits from investing at this level. But you would be able to do it without the need for a huge amount of capital.
“There are two parts to the legislation dealing with securities crowdfunding,” says Chris Tyrrell, the CEO of crowdfunding site Offerboard. “They are designated Title II and Title III.”
According to Tyrrell, Title II crowdfunding is already available. This is the type of funding Offerboard specializes in. “This deals with privately-held securities,” Tyrrell says. “It means you can advertise a post on Facebook saying your company is raising private capital, and certain investors could decide to buy private shares.”
However, this Title II crowdfunding is only available to accredited investors. If you want to buy shares of companies using this type of crowdfunding, you either need $200,000 in annual income, or you need a net worth of $1 million.
For many small business owners and others who have accumulated these types of assets, this offers a chance that would have been unavailable in the past. It's a way to diversify an investment portfolio by investing in businesses.
There will be another stage of crowdfunding when the Title III section of the law takes effect. A comment period for it just recently ended, and there are hopes Title III will be implemented soon. “The current head of the SEC is really behind securities crowdfunding, so there are expectations implementation will be fast-tracked as much as possible and be available sometime in 2014,” says Tyrrell.
Letting Everyone Participate in Securities Crowdfunding
While Title II does present new opportunities in investing, Title III, when allowed, will be nothing short of a revolution in investing. With this portion of securities crowdfunding, anyone will be able to buy shares of startups.
Businesses will be able to raise up to $1 million through securities crowdfunding, and anyone with a few hundred dollars to spare will be able to buy shares in these companies. In fact, you can't invest more than $100,000 in a company if you are buying shares of a company using Title III securities crowdfunding.
“This basically amounts to a new kind of IPO,” says Tyrrell. Small businesses will be able to offer shares in a way that seems very public, even if the company isn't actively trading on a stock exchange. “This could change the way people invest in businesses, and the way smaller businesses raise the money they need for getting started or for expanding.”
However, this type of investing does come with risks — as all investing does. With fundraising like Kickstarter, you know what you're getting into. You don't expect a return on your investment unless it's a sample of a product or some other perk. You know you aren't going to make money off of it.
With securities crowdfunding, though, you are making an investment. You likely expect a return, and this return may not come. You might be left with a worthless piece of stock when all is said and done.
This is one of the reasons the securities crowdfunding law is being implemented in two stages. “Accredited investors can handle the risk a little better,” Tyrrell points out.
Investing in a start-up is always a risky venture. It's one that can come with big rewards, and securities crowdfunding could revolutionize start-up investing, since it will open it up to the most ordinary of investors.
However, if you decide to take part in this revolution as an investor, it's important you consider the risks, and — as always with any investment — you avoid risking money you can't afford to lose.