When investing in Equity Crowdfunding, investors should do extensive research and understand what they are going into. There are always risks involved in investing, and it is no different for Equity Crowdfunding. Investors can invest in CrowdFunding portals, which are regulated by certain bodies such as the SEC. However, as a precaution measure, all retail investors must take a knowledge test before they are allowed to invest in any CrowdFunding portal. This is to ensure that they are well-equipped with the knowledge that they should know about investing before they invest in anything.
Firstly, the chances of the investment being successful is low. This is because they are start-ups and start-ups carry high risk with them as they are not yet established when invested in. Research done by the University of Tennessee found that start-ups have a higher chance of failing with each consecutive year, from 25% of them in the first year to 71% of them in the 10th year of operations (Start to grow, 2016). As such, investors should do their due diligence and must ensure that they are able to handle illiquidity (Marquit, 2018).
Investors should also find out if the securities that they intend on buying have a secondary market. This plays a big role in the liquidity. A secondary market allows investors to trade securities within themselves, and it doesn’t involve the company directly. Investors should also note that they might have to hold onto their equity investments for a long time depending on how long the company takes to exit into the primary market, such as IPO. Reading and understanding the company’s terms and conditions before investing is also important. This is because it concerns the investor’s dividend payment or return policies. Investors do not want to go into any potential investment without knowledge of the individual company’s policies and plans.
Furthermore, understanding the valuation of a company is also highly important for investors. Investors should know the pre-money valuation and post-money valuation and calculate the valuation of the company using methods such as DIscounted Cash Flow (DCF).
Investors should also keep themselves updated with the shares of the company. Selling more shares means more dilution of control within the company. This is because the percentage of the shares that one investor owns in the company will decrease when the total number of shares available for sale increases. Investors should understand this and decide if that is something they are willing to accept.
Investors are strongly encouraged to review the nature and information provided about the offerings. They should do extensive research about the information as these information are not reviewed by the SEC.
Lastly, investors should know that they are not able to claim compensation under the Securities Exchange Act of 2535 if the company has provided false information but must instead use the civil or criminal lawsuit.
Start to grow. 2016. Ep.-28 Facts Before Investing in Equity crowdfunding. Start to grow.
Marquit, M. 2018. What You Need To Know Before Investment Crowdfunding. The Balance.
OnMarket. (n.d.). What to look for before investing in Equity Crowdfunding.