Raise your next round on StartEngine. Apply Now
Raise your next round on StartEngine. Apply
My Portfolio
Account
April 26, 2024 | 3 Min Read

Invest through Equity Crowdfunding: Risks and Rewards

Invest through Equity Crowdfunding: Risks and Rewards

Equity crowdfunding has emerged as a significant player in the investment landscape, democratizing access to early-stage investment opportunities previously reserved for venture capitalists and accredited investors. This financial innovation allows everyday investors to engage directly with startups and small businesses, purchasing equity in these ventures. While the potential for substantial returns exists, it is crucial for investors to understand the inherent risks associated with equity crowdfunding.

Understanding Equity Crowdfunding

Equity crowdfunding platforms enable individuals to invest in private companies in exchange for shares or a stake in the company. This investment model has grown significantly since the passage of the JOBS Act in 2012, which opened the doors for non-accredited investors to participate in private equity markets. As per data from the Securities and Exchange Commission (SEC), the regulation crowdfunding (Reg CF) market has facilitated over $1 billion in capital raised since its inception.

The Rewards of Equity Crowdfunding

  1. Diversification: Investing in startups through equity crowdfunding can diversify an investment portfolio beyond traditional stocks and bonds. This diversification can potentially reduce risk and increase returns.
  2. Access to Early-Stage Investments: Equity crowdfunding provides access to early-stage investment opportunities, which, if successful and subject to certain restrictions, could result in significant financial returns.
  3. Supporting Innovation and Entrepreneurship: Investors have the unique opportunity to support innovation and entrepreneurship. Funding emerging businesses can contribute to job creation and economic growth.

Understanding the Risks

  1. High Risk of Failure: Startup investments are risky, with a high likelihood of failure. According to the Small Business Administration (SBA), approximately 50% of small businesses fail within the first five years. Loss of capital is a real risk that investors must be prepared to face.
  2. Liquidity: Investments in private companies are typically illiquid. Unlike publicly traded stocks, you cannot easily sell your shares on a secondary market. This means your capital could be tied up for an extended period, often several years.
  3. Lack of Information: Private companies are not subject to the same disclosure and reporting requirements as publicly traded companies. This can make it difficult for investors to assess the company’s financial health and prospects.
  4. Dilution: Additional funding rounds can dilute the ownership percentage of earlier investors if they do not reinvest. This dilution can affect the value of the investment.
  5. Regulatory and Market Changes: The regulatory landscape for equity crowdfunding is still evolving. Changes in regulations can impact the attractiveness and feasibility of future investments.

Compliance and Due Diligence

As a regulated activity, equity crowdfunding must adhere to strict FINRA and SEC rules designed to protect investors. Platforms are required to ensure that all offerings are compliant with securities laws, including thorough background checks on companies and their principals. Investors are advised to conduct their own due diligence or consult with a financial advisor to understand the specifics of each investment opportunity.

Conclusion

Equity crowdfunding offers an exciting avenue for both investors looking to potentially increase their returns and entrepreneurs seeking capital. However, the risks associated with this type of investment are significant. It is essential for investors to perform due diligence and consider their financial goals and risk tolerance before committing capital to any crowdfunding venture. By understanding both the risks and rewards, investors can make informed decisions that align with their investment strategies.

Remember, while equity crowdfunding can offer significant returns, it is crucial to approach these opportunities with a well-informed perspective on the potential risks and rewards involved.

Want to stay up to date with the latest posts from StartEngine? Sign up here:

You May Also Like

When Does Crowdfunding Work — and When Doesn’t It?
May 13, 2024
5 min. Read
Howard Marks
Are Equity Crowdfunding Websites Regulated?
May 10, 2024
4 min. Read
The StartEngine Team
What Is Equity Crowdfunding?
May 9, 2024
3 min. Read
The StartEngine Team
@ 2024 All Rights Reserved app
Get To Know Us
Let's Work Together
Need Help

Important Message

IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. INVESTMENTS ON STARTENGINE ARE SPECULATIVE, ILLIQUID, AND INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE POSSIBLE LOSS OF YOUR ENTIRE INVESTMENT.

www.StartEngine.com is a website owned and operated by StartEngine Crowdfunding, Inc. (“StartEngine”), which is neither a registered broker-dealer, investment advisor nor funding portal.

Unless indicated otherwise with respect to a particular issuer, all securities-related activity is conducted by regulated affiliates of StartEngine: StartEngine Capital LLC, a funding portal registered here with the US Securities and Exchange Commission (SEC) and here as a member of the Financial Industry Regulatory Authority (FINRA), or StartEngine Primary LLC (“SE Primary”), a broker-dealer registered with the SEC and FINRA / SPIC. You can review the background of our broker-dealer and our investment professionals on FINRA’s BrokerCheck here. StartEngine Secondary is an alternative trading system (ATS) regulated by the SEC and operated by SE Primary. SE Primary is a member of SIPC and explanatory brochures are available upon request by contacting SIPC at (202) 371-8300.

StartEngine facilitates three types of primary offerings:

1) Regulation A offerings (JOBS Act Title IV; known as Regulation A+), which are offered to non-accredited and accredited investors alike. These offerings are made through StartEngine Primary, LLC (unless otherwise indicated). 2) Regulation D offerings (Rule 506(c)), which are offered only to accredited investors. These offerings are made through StartEngine Primary, LLC. 3) Regulation Crowdfunding offerings (JOBS Act Title III), which are offered to non-accredited and accredited investors alike. These offerings are made through StartEngine Capital, LLC. Some of these offerings are open to the general public, however there are important differences and risks.

Any securities offered on this website have not been recommended or approved by any federal or state securities commission or regulatory authority. StartEngine and its affiliates do not provide any investment advice or recommendation and do not provide any legal or tax advice concerning any securities. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. StartEngine does not verify the adequacy, accuracy, or completeness of any information. Neither StartEngine nor any of its officers, directors, agents, and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, or completeness of any information on this site or the use of information on this site.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks, and you should complete your own independent due diligence regarding the investment. This includes obtaining additional information about the company, opinions, financial projections, and legal or other investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment. See additional general disclosures here.

By accessing this site and any pages on this site, you agree to be bound by our Terms of Use and Privacy Policy, as may be amended from time to time without notice or liability.

Canadian Investors

Investment opportunities posted and accessible through the site will not be offered to Canadian resident investors. Potential investors are strongly advised to consult their legal, tax and financial advisors before investing. The securities offered on this site are not offered in jurisdictions where public solicitation for offerings is not permitted; it is solely your responsibility to comply with the laws and regulations of your country of residence.

California Investors Only – Do Not Sell My Personal Information (800-317-2200). StartEngine does not sell personal information. For all customer inquiries, please write to contact@startengine.com.

StartEngine Marketplace

StartEngine Marketplace (“SE Marketplace”) is a website operated by StartEngine Primary, LLC (“SE Primary”), a broker-dealer that is registered with the SEC and a member of FINRA and the SIPC.

StartEngine Secondary (“SE Secondary”) is our investor trading platform. SE Secondary is an SEC-registered Alternative Trading System ("ATS") operated by SE Primary that matches orders for buyers and sellers of securities. It allows investors to trade shares purchased through Regulation A+, Regulation Crowdfunding, or Regulation D for companies who have engaged StartEngine Secure LLC as their transfer agent. The term “Rapid,” when used in relation to transactions on SE Marketplace, specifically refers to transactions that are facilitated on SE Secondary, This is because, unlike with trades on the StartEngine Bulletin Board (“SE BB”), trades on SE Secondary are executed the moment that they are matched.

StartEngine Bulletin Board ("SE BB") is a bulletin board platform on which users can indicate to each other their interest to buy or sell shares of private companies that previously executed Reg CF or Reg A offerings not necessarily through SE Primary. As a bulletin board platform, SE BB provides a venue for investors to access information about such private company offerings and connect with potential sellers. All investment opportunities on SE BB are based on indicated interest from sellers and will need to be confirmed. Even if parties express mutual interest to enter into a trade on SE BB, a trade will not immediately result because execution is subject to additional contingencies, including among others, effecting of the transfer of the shares from the potential seller to the potential buyer by the issuer and/or transfer agent. SE BB is distinct and separate from SE Secondary. SE Secondary facilitates the trading of securities by matching orders between buyers and sellers and facilitating executions of trades on the platform. By contrast, under SE BB, SE Primary assists with the facilitation of a potential resulting trade off platform including, by among other things, approaching the issuer and other necessary parties in relation to the potential transaction. The term “Extended”, when used in relation to transactions on SE Marketplace denotes that these transactions are conducted via SE BB, and that these transactions may involve longer processing times compared to SE Secondary for the above-stated reasons.

Even if a security is qualified to be displayed on SE Marketplace, there is no guarantee an active trading market for the securities will ever develop, or if developed, be maintained. You should assume that you may not be able to liquidate your investment for some time or be able to pledge these shares as collateral.

The availability of company information does not indicate that the company has endorsed, supports, or otherwise participates with StartEngine. It also does not constitute an endorsement, solicitation or recommendation by StartEngine. StartEngine does not (1) make any recommendations or otherwise advise on the merits or advisability of a particular investment or transaction, (2) assist in the determination of the fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Invest in StartEngine

190% YoY Growth: Invest in the leading equity crowdfunding platform.

Invest Now

This Reg A+ offering is made available through StartEngine Crowdfunding, Inc. This investment is speculative, illiquid, and involves a high degree of risk, including the possible loss of your entire investment. For more information about this offering, please view StartEngine’s offering circular and risks associated with this offering.

 

Kevin O’Leary is a paid spokesperson for StartEngine. Read the 17(b) disclosure here.

Founder's Summit Application