Smart entrepreneurs, some Title III crowdfunding skeptics say, do not want hundreds or thousands of unsophisticated angel investors mucking up their capitalization tables, annoying founders with questions, suggestions, job applications, and—gulp—complaints.
Title III equity offerings are predominantly C corporation stock, limited liability company (LLC) membership units, convertible debt, and a relatively new structure called a simple agreement for future equity (SAFE). This article covers the fundamentals of each of these securities, and their advantages and drawbacks for investors.
Crowdfunded equity investments are generally illiquid for two reasons: (a) the one-year holding period and (b) the lack of organized secondary markets for Title III shares.
This brief history includes rewards, donation, debt, and equity crowdfunding platforms in the USA, going all the way back to 2003.
Crowdfunding is a method of collecting many small contributions, by means of an online funding platform, to finance or capitalize a popular enterprise. Crowdfunding gained traction in the United States when Brian Camelio, a Boston musician and computer programmer, launched ArtistShare in 2003.
The first step in the seven-step crowdfunding investment plan is to calculate the maximum amount of money that you are allowed to invest each year in Title III offerings.
On equity crowdfunding portals and platforms, you will have an opportunity to collaborate on deal selection and due diligence with other investors. Like social networks, the portals/platforms will show profiles of the investors who participate in these discussions, so you can assess their expertise and credibility.
Spread out your crowdfunding investments, ideally 10 to 15 deals, over three to five years. Develop an equity crowdfunding budget for the coming 12 months. Be patient and select offerings that are most likely to result in strong ROI.
The first rule of investing is: diversify. The benefits of diversification—spreading the risk—apply not only to your overall investment portfolio (on a macro level), but to each asset class (on a micro level) as well.
Supporters of crowdfunding acknowledge that some fraud will probably occur, as it does everywhere—including the public securities markets. But they point to the low instance of fraud in rewards-based crowdfunding in the United States, and in equity-based crowdfunding in Australia (since 2006) and the United Kingdom (since 2012), where unsophisticated investors participate in private securities offerings.
When you start looking for offerings to invest in, look first in the industries where you have knowledge or experience; or look for consumer products and services that you are familiar with. Later you can consider offerings in certain other industries for diversity. Make sure you understand the basics of private securities: stock, LLC shares, and convertible debt.
Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 allows all investors, regardless of income or net worth, to invest in startups and growing private companies via funding portals that are registered with the Securities and Exchange Commission.