Investing in Alternative Assets can produce impressive returns, but with those returns comes risks and regulatory challenges. In order to profit from investments in early stage equity and coin offerings, strategies to lower risk and ensure compliance are imperative. We cover firms offering due diligence, diversification, and insurance both directly to you and as an added service to the investing portals.
Innovations and Risks
Likely the reason you are here reading this is that you are more of a risk taker. You are willing to potentially lose all of what you put in at the chance of getting returns of many multiples of what you put in. This risk is much higher with alternatives like startup investing that we focus on at Fund Wisdom. We review a few different sources to reduce levels of risk as much as possible.
Changing regulations and innovations in financial technologies are opening access to new forms of investments. Investing portals are offering new forms of access to securities like equity, cryptocurrencies, debt, and more. This has created opportunities to generate wealth that was historically only open to accredited investors. We explain this further in our investor section. Accredited investors are those high net-worth investors, who are certified by the Securities and Exchange Commission (SEC) to invest a percentage of their income in exchange for a stake in the company. Equity funding through portals provides an incredible opportunity for investors and startups to exchange equity and capital in a more efficient manner.
While investors and entrepreneurs need to be aware of the risks involved in these changes, this form of financing creates the potential for huge rewards. This has the potential to spur economic expansion and job creation. The increase in access to capital for innovative ideas is speeding business life cycles and opening up opportunity for investors willing to take the risk.
Assessing the Risk - Due Diligence
A due diligence and disclosure company for online offerings providing transparency and investor protection to platforms, investors and entrepreneurs. Sara Hanks, Founder and CEO of the firm recently shared with us, "We help to make sure the investor has the tools to make an informed investment decision. We thus protect the issue, the investor and the intermediary."
CrowdCheck, takes the hassle out of the due diligence process, and has partnered with some of the leading online investment platforms such as SeedInvest and WealthForge. CrowdCheck helps people on both sides of the ledger. For investors, the company provides them with a tool to combat against potential fraud, and presents the due diligence check investors are looking for in a simplified manner. Entrepreneurs seeking funding also benefit from the service vetting potential investors. The company was founded by Sara Hanks where she employs a team of securities attorneys and research analysts.
research and due diligence will be used to reduce risk for those investing through the current equity funding platforms.
Investors and entrepreneurs can exchange capital and equity on platforms and for this service, the platform receives compensation either in up front fees or fees structured to the deal itself. Many of these online investment platforms perform due diligence themselves officiating those that list on their sites. This is due in part to regulatory obligations and potential liabilities. The work done to help with the due diligence process on their part can shield them from these risks and help you. In our listings we call out the level of effort and service each platform performs.
Determining Price - Valuation
There is increased importance having investments verified by a third-party evaluation service. In fact, a recent survey by Propel(x) found that nearly 95% of angel investors and just about 90% of non-angels point to the importance of third-party expert evaluation services as an important tool in investment decision making. Examples of companies that are leading the way in this area include AlgoValue and Value Analytics & Design.
AlgoValue provides an online valuation platform and cap table analysis that features indispensable tools. One of them is a 'Term Sheet Analyzer,' which allows users to run a range of 'what if' scenarios before putting pen to paper. The 'Enterprise Valuator' features a comp database of more than 11,000 companies and provides a convenient way to measure a company's value, even those that may be in the pre-revenue stage, and the company's 'Compliance Wizard' could certainly come in handy for complex tax and valuation issues. In case you just want someone else to do the work for you a valuation expert can be consulted. At Fund Wisdom we have had the chance to work with third-party valuation expert Value Analytics & Design.
Hedging Against Loss - Insurance
American International Group Inc., better known as AIG, has dipped its toes into the equity crowdfunding market with the introduction of an insurance product aimed to protect investors. The product is known as "Crowdfunding Fidelity,"
It was designed to protect individual investors against issuer fraud that could occur via theft of issuer assets by those involved with the issuing company. The product is currently available to platforms in Canada and the UK. Eureeca, a Dubai-based crowdfunding platform that is registered in the UK, has already signed on. Chris Thomas, Eureeca's founder and co-CEO, provided some thoughts on his company's decision, via a press release that touted AIG's new product.
There is inherent risk in virtually any investment which range from the size of the small and manageable 'growing pains,' all the way to the other end of the spectrum to the range of 'Houston, we have a problem...' Even the most optimistic investors have a sense of wanting to 'hedge their bets.' But do you need equity crowdfunding insurance? One of the world's largest insurers thinks so, and they have introduced a product that's the first of its kind in the burgeoning crowdfunding space.
"The new power of the crowd and the desire to democratize investing throughout the world can unleash great partnerships. The success of the ecosystem depends on collaboration between all stakeholders. AIG has demonstrated its commitment to being a valued insurer to this new industry by engaging the crowdfunding space at such an early stage." Thomas said. Lex Baugh, AIG's President of Liability and Financial Lines, had this to say, "As a sector still in its infancy, equity crowdfunding platforms are only as strong as the confidence they instill in their investors. This new product will help provide that confidence and help to support this asset class as it matures," Baugh said.
There's a couple of different takeaways on AIG's issuance of a product specific to the equity crowdfunding space. First, for a financial behemoth of the size of AIG to dip its toes into the water, there's a pretty good chance the space will continue on its upward trajectory. Second, while additional protection for investors is a positive step, will the coverage continue to be necessary as the industry matures and regulations are finalized?
U.S. Securities and Exchange Commission (SEC)
Office of Investor Education and Advocacy
100 F Street, NE, Washington, DC 20549-0213
Telephone: (800) 732-0330
Financial Industry Regulatory Authority (FINRA)
FINRA Complaints and Tips
9509 Key West Avenue, Rockville, MD 20850
Telephone: (301) 590-6500
Diversification with Funds
We review a set of funds that can help reduce risk through diversification.
TheFunded.com is a rating system that let entrepreneurs rate their investors. The interface is poor, but the data is robust on the larger funds. It claims to be the "Yelp of Venture Capital" and was created to allow portfolio companies to rate their investors.
Ultimately it is up to you to assess the risk involved. No matter how much time you put into due diligence there is still a likelihood of loss, insurance is not infallible, and diversification can only go so far. While this industry presents great risk the potential rewards for me are worth it. Finding something you are passionate about and getting involved with a team that is looking to disrupt an industry and innovate to build something great can be incredibly rewarding.