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.
Before you can invest in Title III offerings, you need to know where to look for them—i.e., on which Title III funding portals and/or broker-dealer platforms. There will be lots of brand-new Title III portals and platforms over the next few years, some better organized than others, some easier to navigate than others, some with more and better offerings than others. Some will feature offerings across a variety of industry categories. Others will list offerings in narrow industry sectors such as retail businesses, consumer products, high-tech startups, etc. Some portals and platforms will have offerings with low minimum investments (in the $100 to $1,000 range), while others will have more expensive offerings (above $1,000 minimum). Portals and platforms may be distinguished by the types of securities they list (stock, LLC shares, convertible debt, straight debt, etc.), the stage of development they look for (seed, startup, growth, later, etc.), and other criteria.
Before you know which portals and platforms on which to search for offerings, you should identify what kinds of offerings you want to invest in. So we’ve moved backwards from selecting the right funding portals (Step 4) to targeting suitable offerings (Step 3).
In Step 3 you will narrow down the kinds of Title III offerings that you want to target.
We assume that your primary motivation is to maximize return on investment and achieve portfolio diversification. This seven-step plan is not designed for people whose primary motivation is to achieve social benefits—that is, the social impact of your investment, brand loyalty, community development, and/or the pleasure of investing alongside family, friends, colleagues, and/or people who share your social values.
You should not reasonably expect to achieve both social and financial objectives in the same investment—if it happens to work out that way, consider yourself lucky. Instead, most opportunities will be principally one or the other.
Portfolio diversification is about finding a mix of investments. You can hold a mix of social-impact and financial-return investments, but each investment should be optimized for one objective or the other.
If you are unsure about your motivation, the following list breaks the various kinds of financial motives that you might have. If you don’t identify with any of these motives, you probably are more socially motivated than financially.
These offerings are more likely to result in a shorter-term exit (via acquisition or IPO) and larger (possibly spectacular) returns, but are also more likely to be crushed by competitors in the early stages, burn through seed capital, and need more rounds of financing (which may result in dilution of share value or the need to invest more capital in later rounds). Examples are technology and healthcare. If you do not understand the technology and/or the business model, then this is more akin to gambling where the odds are against you.
You represent “patient money” and look for established but still early-stage businesses that have solid growth strategies. Due diligence will be comprehensive, with special focus on whether the business can become self-sustaining (use retained earnings rather than external sources of capital) and identifying realistic exit strategies. These companies include commercial and agricultural real estate; service providers such as building contractors, healthcare, cleaning services, and auto repair; and franchisees.
This includes operations such as oil and gas exploration, small-scale mining of precious metals, or pre-patent inventions (e.g., batteries, solar panels). A hit (or a desired patent) will result in potentially huge gains for investors, while a miss will often result in a total loss; there is rarely a middle ground. Such speculators, known as wildcatters in the oil and gas industry, must have a high tolerance for risk.
If you are a consultant or professional adviser, investing in a small business might help you reel it in as a prospective client. You might invest in a company because you want to get a job there. If you currently own or manage a business, you might sink money into startups that could become your company’s suppliers, strategic partners, sources of R&D, or even acquisition targets. In Title III offerings, where there may be hundreds or thousands of investors in a deal, you would have to invest a noticeably large amount to gain the recognition you need from the issuer. This category may hit ethical or legal issues: In general, “vertical” investments—those related to you in the chain of goods or services—are fine, but “horizontal” investments, which are essentially competitors (whether direct or indirect) are likely to be barred by the issuer—and may be illegal.
Experienced angel investors and venture capitalists, small incubators and accelerators, corporate entrepreneurship programs, and even institutional investors will be cherry-picking some of the best deals on equity crowdfunding sites. Their participation in an offering is sometimes highly visible. While there is no guarantee that these sophisticated groups will do complete due diligence and apply the same variables that you would apply, this is a very intriguing investment type for those who want to invest but don’t have the time or experience to perform due diligence on their own. Following “smart money” is one fairly prudent way to invest, although it is never a sure thing—even the most successful angel investors make bad investments most of the time. We don’t want to discourage you from following the smart money, as long as you understand the risks involved in leaving the analysis and due diligence to others.
We will proceed on the assumption that you are financially motivated. Before you pinpoint the kinds of offerings you will consider investing in, browse through the offerings on a few equity crowdfunding sites to get a feel for what kinds of companies appeal to you—and why.
We suggest that you begin searching for suitable offerings in an industry where you have experience and knowledge, at least in the first year or two. As you gain confidence in your ability to select good deals, you might want to broaden your scope, for greater diversification, to other industries where you feel you can study and become knowledgeable.
If you lack experience in angel investing and need direction aside from targeting an industry in which you have expertise, you can target offerings (if any such offerings are listed) using the following approaches, for a slight dose of safety:
Also, don’t be afraid to pull in the experience and investment skills of friends and colleagues—especially successful business executives and entrepreneurs, business lawyers, and accountants—and from those you can network with online. Consider visiting chat rooms and discussion groups for crowdfunding investors, both on- and off-platform (including LinkedIn groups), before making investment decisions. Get a feel for members of those groups who are well informed and insightful and who ask good questions, and don’t hesitate to initiate one-on-one conversations with them. While you cannot wholly rely on the perspectives of people you don’t totally know and trust, you can factor their ideas into the bucket of information you use prior to making final selections.
You have probably heard the axiom “Invest in what you know,” commonly attributed to Peter Lynch, an extraordinarily successful investor with Fidelity Investments’ Magellan Fund from 1977 to 1990. You have a better chance of earning a good return by investing in an industry where you have knowledge and experience—this is generally true whether you invest in public or private securities.
Traditionally, if an angel investor had no expertise in a particular field, he or she could join an angel group where other members had that expertise, so members of the group could collaborate on evaluating investment opportunities and, farther down the road, due diligence. But angel groups admit only accredited investors.
Equity crowdfunding makes collaboration possible among non-accredited angel investors. When you register on a funding portal, you have an opportunity to ask questions and share ideas with other investors—the crowd—before you decide whether to invest. So one of the most important things you should do when you join a discussion on a crowdfunding portal is check out the education and industry experience of the investors whose opinions you take into consideration.
Another reason why you, as an investor, do not need to feel confined to a familiar industry, Lynch’s advice notwithstanding: New research and review tools and services are emerging in the equity crowdfunding world that will help investors scrutinize and evaluate the offerings posted on funding portals. Pioneers in this field, such as Stratifund and Zacks CF Research, developed such tools and services for the equity crowdfunding market because they anticipate a huge demand for them by investors who have never before considered buying private securities.
We give you what you need to know about stock (preferred and common), LLC shares, and convertible debt in the FUNDAMENTALS section of this website. Be sure you are comfortable in this environment (you don’t have to become an expert, just get the general hang of it) before you proceed to the next step.
We would never discourage you from seeking advice from your professional financial adviser on how to plan your long-term investment strategy. Keep in mind, however, that advisers who are not thoroughly familiar with the risks, rewards, and economics of Title III equity crowdfunding will tend to reflexively warn you not to invest in Title III deals, because they are novel. Some of them will fear that you might hold them partly accountable for losses if they don’t dissuade you from making risky investments. Money managers and stockbrokers may also have an incentive to advise against Title III deals because they do not earn commissions on crowdfunding transactions.
David M. Freedman has worked as a financial and legal journalist since 1978. He has served on the editorial staffs of business, trade and professional journals, most recently as senior editor of The Value Examiner (National Association of Certified Valuators and Analysts). He is coauthor of Equity Crowdfunding for Investors, published in June 2015 by…
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