The allure of investing early in a high growth startup company is the potential for huge returns, but historically was restricted to the wealthy. Now anyone can invest in publicly available offerings due to regulatory changes improving accessibility. The cap for Regulation Crowdfunding was just increased to $5 million. There is currently no central market to view every single offering available. There is a multitude of platforms that are offering investments so choices are abundant. This causes a wide range in fees and legal structures behind each offering and platform.
Open Access from Regulatory Changes
Alistair Barr, Annie Massa and Sarah McBride of Bloomberg put it best with their article, "The Big Money in Startups Comes From Investing Before the IPO." Investing in the next big thing at an early stage historically has been a major challenge for most. In many countries there are laws and restrictions, based upon wealth requirements, to invest in early stage high growth companies. In the USA qualifying as an accredited investor, as defined by the SEC, historically was required to participate in most offerings but that has recently changed. Innovative platforms below bring expanded access and educational resources to learn how to invest within this changing regulatory environment.
Where to Invest
Investing Portals, Equity Crowdfunding Platforms
Equity crowdfunding platforms are a subset of investing portals that help connect individual investors with access to previously inaccessible investment opportunities in startup and growing small businesses online. At Fund Wisdom we review, provide a ratings system, rank top portals and provide market insight on the industry.
Equity crowdfunding is essentially an investment arrangement. We define investing portals focused on accredited investors and equity crowdfunding portals focused on non-accredited. The investment is loosely defined as an agreement in which ownership in a company is issued via equity to investors based on the size of the individual investors’ investment. Inherent within almost all equity investing platforms is the need to register as an investor as a means of verification.
There are equity crowdfunding platforms such as PeerRealty and CircleUP that act as intermediaries fostering the relationship between investors and companies; this also applies to funds engaged in active fundraising rounds. In certain cases these companies will hold invested funds in escrow until the round ends successfully before funds transfer.
Other companies namely Crowdfunder and Fundable provide a platform for companies to advertise their fundraising efforts to the masses. Here investors either make a nonbinding pledge otherwise known as a show of interest, or the investor chooses to go-all-in and sign a commitment to invest within a specific period of the funding rounds closing. Platforms offerings are not all mutually exclusive, with each offering a mix of advantages.
Most platforms have built out extensive sections to help educate both investors and entrepreneurs like OurCrowd and Angellist. Several independent educational sites have been created to help guide investors and entrepreneurs through the process of using these platforms. Brian Belley created CrowdWise to provide a collaborative educational environment for investors in equity crowdfunding. That means courses, eBooks, videos, blog posts, and more. Salvador Briggman of CrowdCrux built a free course on equity crowdfunding, how it works, use it in your business, and the regulations.
Platforms such as EarlyShares and PeerRealty require substantial investment minimums which exclude most non-accredited investors due to the restrictions placed on the amount of required annual investment.
Investors can place startup investments with less than $1000.
Many platforms have created fund structures with Special Purpose Vehicles (SPVs) via service providers like Assure. The benefit here is that they offer an unprecedented investment opportunity for gaining exposure to an entire asset portfolio with one single investment. AngelList operate funds or syndicates that own shares in numerous companies or asset classes.
Tax Advantaged Retirement Accounts
We partner with RocketDollar as they offer Self Directed retirement accounts (IRAs) and 401ks. Invest securely and easily in Real Estate, Startups, and more. They recently published an article that details some of the benefits for Coronavirus relief changes that went into effect that can be applied to their accounts. Offerings are set at $15 a month and $30 a month for their plans.
Increasing Funding Caps - Regulation A
Under regulatory amendments made to the JOBS Act and Regulation A; the rules are mandated by Title IV of the Jumpstart Our Business Start-ups (JOBS) Act. Eligible entities can raise up to $50 million in any 12-month period. The final rules commonly known as Regulation A+ illustrate two distinct fundraising tier offerings:
- Tier 1. Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements (US Securities and Exchange Commission).
- Tier 2: Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.
There are no limitations placed on non-accredited investors access to Tier 1 offerings. Alternatively, there are some limitation placed on non-accredited investor access to Tier 2 offerings. For instance, non-accredited investors can’t invest more than 10% of their net income (individual or joint with a spouse) or 10% of their net worth (US Security and Exchange Commission).
Cashing Out - Liquidity
Equity crowdfunding involves the purchase of equity, in the form of shares predominately, in privately held companies. In most cases these shares aren’t and cannot be traded on public exchanges. In certain cases some tier 2 companies opt for public listings. And though some crowdfunding entities do make regular income distributions you are still very likely to wait for quite some time before you realize any real return on your crowdfunding equity investment. And that presupposes that the company actually survives let alone thrives. Generally real returns are only realized after the company is bought out or launches an IPO or alternative ICO/ STO. SharesPost has been a leader in providing access to cashing out earlier for investors and employees alike.
In equity crowdfunding the company or entity valuation is a direct function of the dollar amount raised against the amount of equity offered, independent of company fundamentals. If the entity scales, the individual investors could realize an appreciation in their stake. If a company gets acquired or launches an IPO, investors may realize a substantial return on their initial investment. Conversely, shareholders can lose their shirts in unsuccessful ventures.
We hope the early stage growth company you invest in will reach an initial public offering or you are able to achieve returns through an acquisition. We look forward to hearing about your experience in the comments section below or contact form.