Investing in Equity CrowdFunding might bring about high returns or high losses. For the investors who are skeptical about Equity CrowdFunding and what benefits investing in it could potentially bring for them, there are several types of returns and investors can fall into any one of the categories. As investors, you must understand that Equity CrowdFunding is a high risk, high reward investment.
Firstly, the company will pay dividends. Dividends are what the company pays its investors when it has made profit. However, one must note that this entirely depends on the company’s policies. Some start-ups could decide to put all the profits they have made into their business. As a result, the investors will not receive any returns for a few years.
Secondly, new and bigger investors will buy shares. These investors are usually VC investors and they do not like to have multiple shareholders in the same company. As such, they will attempt to buy the shares of all the small investors in the company. This will make a good opportunity for investors to gain returns as they will be able to sell the shares at reasonable prices.
Another form of return is when the company is acquired by another company. Usually, acquisitions are done by equal or bigger sized companies and they have expansion or merger plans. This would increase the market shares as the value of the company will be measured prior to the sale. As such, the shares will generate returns to the investors when they sell them. An example of an acquisition would be Oculus VR, who was acquired by Facebook for USD$2 billion in 2014 (Mitchell, 2014).
Lastly, a form of return is through IPO. The company is brought to the public market with the aim of gaining more capital or to liquidise the initial investments of investors which will allow shares to be sold by the investors. IPOs are an extremely high risk, high reward form of return. Between 1980-2000, the top 100 IPOs earned more than 1,000% in the first three years (Field and Lowry, 2009), but 1 out of 10 of investors will also lose all their money as some companies fail after the offerings (Signori and Vismara, n.d.), which makes this form of return particularly risky.
Start to grow. 2016. Ep.-30: return of equity crowdfunding.
Field, L.C. & Lowry, M. (2009). Institutional versus individual investment in IPOs: the importance of firm fundamentals. Journal of Financial and Quantitative Analysis, 44, 489-516
Signori, A. & Vismara, S. (2016). Returns on Investments in Equity Crowdfunding. Available at SSRN:
https://ssrn.com/abstract=2765488 or http://dx.doi.org/10.2139/ssrn.2765488
Mitchell, R. (2014). Oculus Rift: From $2.4 million Kickstarter to $2 billion sale. Engadget.