Crowdfund Investing: A Beginner's Guide to Investing in Startups

Crowdfund investing is a great way to support startups and potentially earn a return on your investment. In the US, the Securities and Exchange Commission (SEC) regulates crowdfunding platforms.

You can invest in startups through platforms like Kickstarter and Indiegogo, but these platforms are not registered with the SEC. Platforms like Seedrs and Crowdfunder are registered with the SEC, allowing you to invest in startups in exchange for equity.

Investing in startups carries a high level of risk, with a 70-90% failure rate within the first 20 months.

Crowdfunding is a way to raise small amounts of money from a large number of individuals to finance a new business venture. It leverages social media and crowdfunding websites to connect investors and entrepreneurs.

The 2008 financial crisis led to the rise of crowdfunding, as banks enforced stricter lending policies and small businesses struggled to secure credit. This prompted many to seek alternative funding methods.

Crowdfunding involves the use of small amounts of capital from a large number of individuals, which can be donated altruistically or exchanged for rewards such as equity in the company.

The global crowdfunding market volume was estimated at $1.17 billion in 2023, showing a slight increase from previous years.

Crowdfunding has a rich history that spans over two decades. The first known baseline design of equity crowdfunding was proposed in 2000 in Russia, where a computer database would provide information on business plans and offer professional risk-assessment services.

The first known equity-based crowdfunding platform was launched in 2007 in Australia, called the Australian Small Scale Offerings Board (ASSOB), which has since raised over $150 million for 176 private companies. In the US, the first equity-based crowdfunding platform, ProFounder, was launched in 2011 but shut down due to regulatory reasons.

To ensure investor protections, crowdfunding platforms are subject to specific regulations. These regulations include limits on how much non-accredited investors can invest in crowdfunding offerings within a 12-month period, registration with the Securities and Exchange Commission and FINRA, and the requirement for companies to provide detailed information about their business and financial condition in a document called Form C.

Investor protections also include a 48-hour period to cancel investments before an offering closes. While regulations provide a safety net, it's essential to conduct thorough research before investing and understand the risks involved.

Crowdfunding is regulated to protect investors, and creators on crowdfunding platforms are often inexperienced and lack the ability to complete funded projects by agreed deadlines. This highlights the importance of verifying projects and "free-riding" on other investors' funding histories to avoid potential losses.

The concept of equity crowdfunding has been around for a while, dating back to a proposed baseline design in Russia in the year 2000. This design aimed to facilitate crowdinvesting for entrepreneurs and small businesses.

The first known equity based crowdfunding platform was launched in 2007 in Australia, called the Australian Small Scale Offerings Board (ASSOB). It's now known as Enable Funding and has raised over $150 million for 176 private companies.

A standardized type of investment agreement called "SAFE notes" was developed in 2013 by Y Combinator. This was a significant step in making equity crowdfunding more accessible and efficient.

The first US-based company to launch a model for startups to raise investments directly on their site was ProFounder, which launched in May 2011. However, they shut down their business due to regulatory reasons.

Early platforms like CrowdCube and Seedrs in the UK were also pioneers in the equity crowdfunding space.

Regulation plays a crucial role in protecting investors and ensuring that crowdfunding platforms operate fairly and transparently. In the US, the Securities and Exchange Commission (SEC) oversees crowdfunding platforms to ensure compliance with federal laws and regulations.

The SEC requires crowdfunding platforms to register with them and FINRA to ensure compliance with securities laws. This is to prevent unregistered platforms from operating and to protect investors from potential scams. Companies offering securities through crowdfunding must provide detailed information about their business, financial condition, and risks in a document called Form C.

Investors have a 48-hour period to cancel their investment before the offering closes. This is a crucial protection for investors, giving them time to review the offering and make an informed decision. Additionally, crowdfunding platforms must limit how much non-accredited investors can invest in crowdfunding offerings within a 12-month period, based on income and net worth.

Some states in the US have enacted their own crowdfunding exemption laws, allowing intrastate investment offerings that are already exempt from federal regulation. For example, the Invest Kansas Exemption and the Invest Georgia Exemption have $1m/$10k caps. These laws aim to facilitate crowdfunding within state borders while still protecting investors.

Regulation Crowdfunding (Regulation CF) was adopted by the SEC in 2015 to implement crowdfunding provisions of Title III of the JOBS Act. This regulation allows companies to raise up to $1.07 million (later increased to $5 million in 2021) from non-accredited investors through crowdfunding platforms. However, companies must comply with specific rules, including providing detailed information about their business and financial condition.

Here are some key regulations to keep in mind:

These regulations aim to protect investors and ensure that crowdfunding platforms operate fairly and transparently. By understanding these regulations, investors can make informed decisions and avoid potential scams.

In the US, crowdfunding platforms are overseen by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other regulatory bodies.

To ensure compliance with securities laws, crowdfunding platforms must register with the SEC and FINRA.

The Howey Test is a general rule used to determine if a transaction constitutes an investment contract, which would be considered a security. The test states that a transaction is an investment contract if there is an exchange of money with an expectation of profits arising from a common enterprise, which depends solely on the efforts of a promoter or third party.

Some investor protections on crowdfunding platforms include limits on how much non-accredited investors can invest, registration with the SEC and FINRA, and detailed information about the company's business and financial condition in a document called Form C.

Investors also have a 48-hour period to cancel their investment before the offering closes.

Crowdfunding platforms operating under Regulation CF, which was adopted by the SEC in 2015, are expected to provide investment access via equity crowdfunding as early as mid-May 2016 (pending SEC approval).

In the US, crowdfunding can breach various securities laws, unless the opportunity has been filed with the Securities and Exchange Commission (SEC) or other regulatory authorities.

The SEC has different ways of determining what is and what is not a security, but a general rule is the Howey Test, which says that a transaction constitutes an investment contract if there is an exchange of money with an expectation of profits arising from a common enterprise.

Regulation Crowdfunding (Regulation CF) was adopted in 2015 to implement crowdfunding provisions of the JOBS Act, adding a new exemption from registration requirements for certain crowdfunding transactions.

Online platforms operating under Regulation CF are expected to provide investment access via equity crowdfunding as early as mid-May 2016 (pending SEC approval).

The penalties for a securities violation can vary greatly and depend on the amount of profit obtained by the promoter, the damage done to the investors, and whether a violation is a first time offense.

To ensure compliance with securities laws, crowdfunding platforms must register with the SEC and FINRA, a not-for-profit organization that helps regulate the US securities industry.

Here are some key investor protections on crowdfunding platforms:

Understanding the risks involved and diversifying your portfolio are important, even with regulations in place.

Crowdfunding can be a high-risk venture, and there are several potential downsides to consider.

One major con is that if you don't reach your funding goal, the pledged funds will be returned to investors, leaving you with nothing.

This can be a significant financial blow, and it's essential to have a solid plan in place to mitigate this risk.

Another potential drawback is that crowdfunding may damage your or your company's reputation if not handled carefully.

Here are some key cons to keep in mind:

China has been at the forefront of equity crowdinvesting, with the prime minister endorsing it in 2014 as a solution to financing difficulties for small and medium enterprises.

In 2015, the China Securities Regulatory Commission approved the first eight equity crowdinvesting platforms.

Portugal was slower to regulate crowdfunding, but in 2015, the Lei 102/2015 de 24 de agosto Regime jurídico do financiamento colaborativo recognized four types of crowdfunding: donation, reward, equity, and debt.

The Portuguese government requires crowdfunding platforms to be registered with the DGC and monitored by the CMVM, with investors able to receive their money back if conditions are not met.

China has been a pioneer in equity crowdinvesting, with prime minister Li Keqiang endorsing it as a solution to financing difficulties for small and medium enterprises in 2014.

In November 2014, Li Keqiang made a crucial statement in the State Council address, backing equity crowdinvesting as a means to address the financial challenges faced by small businesses.

The China Securities Regulatory Commission (CSRC) took a significant step forward by approving the first eight equity crowdinvesting platforms on January 20, 2015.

This move marked a significant milestone in the development of equity crowdinvesting in China, paving the way for more businesses to access funding through this innovative approach.

Estonia has a thriving equity crowdfunding scene, with Change being the largest equity crowdfunded company, having raised over €20M to-date.

The first equity crowdfunding system was launched in Estonia in August 2015 by Fundwise, marking a significant milestone in the country's crowdfunding journey.

Estonia's crowdfunding landscape is guided by the Good Practice of Crowdfunding guidelines, set up by Finance Estonia industry association and Deloitte in 2016, which serves as a framework for responsible crowdfunding practices.

Funderbeam is a notable player in Estonia's crowdfunding scene, as it is the only equity crowdfunding platform in Europe licensed for trading of investments in a secondary marketplace, with licenses from the FCA (UK), EFSA (Estonia), and MAS (Singapore).

Portugal has been a bit slow to regulate crowdfunding, but things changed in 2015 when the Lei 102/2015 de 24 de agosto Regime jurídico do financiamento colaborativo was passed.

The law recognizes four types of crowdfunding: donation, reward, equity, and debt, and requires platforms to be registered with the DGC (General Consumer Office).

Seedrs, co-founded by Portuguese Carlos Silva, was the first equity crowdfunding platform to receive regulatory approval from the UK Financial Services Authority.

Some popular crowdfunding platforms in Portugal include PPL, a donation and reward-based platform, and MassiveMov, which aims to fund innovative projects.

Novo Banco Crowdfunding is another initiative that aims to raise money for social projects promoted by NGOs and charities, with 10% co-financed by NOVO BANCO.

The CMVM (Securities Market Commission) is responsible for monitoring crowdfunding activities in Portugal, and has 3 months to create supervision norms and regulations.

According to the law, investors can receive their money back if the announced conditions are not met.

Investing in Australia is regulated by the government to protect investors and ensure a safe and fair market. In 2017, the Australian government amended the 2001 Corporations Act to provide a legislative framework for crowd-sourced funding. This framework allows for a more accessible and inclusive investment environment.

In Nigeria, investing is a legitimate way to support businesses and entrepreneurs. Micro, small, and medium enterprises can raise funds through a Crowdfunding Portal, but they must be incorporated as companies with a minimum two-year operating track record.

The Nigerian Securities And Exchange Commission has specific rules for crowdfunding, which include the issuance of shares, debentures, or other investment instruments. This allows eligible businesses to raise funds from a large number of people, typically through an online platform.

To be eligible, a business must have a minimum two-year operating track record and be incorporated as a company. This is a significant opportunity for businesses to access funding and grow their operations.

The Commission may determine the specific investment instruments that can be issued, so it's essential to check the latest regulations. By following these rules, businesses can tap into the potential of crowdfunding to raise funds and achieve their goals.

Here's a summary of the key requirements for investing in Nigeria:

By understanding these requirements, businesses and investors can navigate the world of crowdfunding in Nigeria with confidence.

Popular platforms like Wefunder and Indiegogo have made it easier for investors to get involved in crowdfund investing. Wefunder is an equity crowdfunding platform that connects investors with early-stage startups, allowing you to buy a stake in a company, hoping it will grow and increase the value of your investment.

Wefunder charges investors transaction fees, ranging from 2% to 5.5% of the investment amount, depending on the payment method. You can even use a self-directed IRA to invest in companies listed on Wefunder, but be aware that every investment listed on Wefunder is riskier than a public company listed on the stock market.

Indiegogo, on the other hand, started as a crowdfunding site for independent films but expanded to all project categories in 2009. It's seen as a less strict and more flexible platform than Kickstarter, allowing campaigners to choose between fixed and flexible funding models.

There are two types of funding portals: registered and unregistered. A registered portal is required if you need investment advice, as it must determine whether an investment is suitable for you.

An unregistered funding portal cannot give investment advice. You should use a registered portal if you need help assessing the risks and potential returns of an investment.

A funding portal must advise investors whether or not it is registered. You can check with your local securities regulator to see if the funding portal can do business in your province.

Here's a quick rundown of the key differences between registered and unregistered funding portals:

If you're unsure which type of portal to use, it's always a good idea to check with your local securities regulator for guidance.

Indiegogo started as a crowdfunding site for independent films but expanded to all project categories a year after its 2008 launch. It's a less strict and more flexible platform than Kickstarter, giving backers more flexibility by allowing campaigners to choose between fixed and flexible funding models.

Indiegogo's flexible funding model allows campaigners to receive funds as they come in or wait until the target is reached. This might be easier and less risky for a campaigner, but regardless of the amount raised, campaigners must still deliver on any promises made.

Crowdfunding platform fees range from 5% to 12%, and Indiegogo's fees are likely to be within this range. Before choosing a crowdfunding platform, be sure to examine the fee structures for any punitive charges.

Indiegogo's Campaign Playbook offers valuable tips and best practices for nonprofits and specialized tips for tech and film projects.

If you're considering crowdfund investing, it's essential to know what you can expect in return for your investment. With start-up crowdfunding, investors receive securities in exchange for their investment.

The type of security you'll receive depends on the type of crowdfunding platform you're using. You can expect to receive debt securities, equity securities, limited partnership units, or convertible securities.

Crowdfunding platforms often provide tools to track your investment and stay updated on the company's progress.

Investing in a start-up business through crowdfunding can be a great way to get involved in the early stages of a company, but it's essential to understand the pros and cons.

Crowdfunding platforms provide tools to track your investment and stay updated on the company's progress.

One of the most significant advantages of crowdfunding is its ability to provide access to a larger and more diverse group of investors or supporters.

Investment minimums often start at $100, making it a relatively accessible way to invest in a start-up business.

Equity-based crowdfunding allows startup companies to raise money without giving up control to venture capital investors.

With start-up crowdfunding, investors receive securities in exchange for their investment, which can include debt securities, equity securities, limited partnership units, and convertible securities.

For crowdfunding that operates on a donation basis, the company does not need to pay back investors.

However, many companies offer incentives for early backers, such as an advance copy of the product.

The crowdfunding industry is regulated under the JOBS Act, enacted on April 5, 2012, which established equity crowdfunding in the U.S.

Statistically speaking, a high percentage of start-ups and early stage businesses fail, making investing in these businesses risky.

Before you invest, the funding portal is required to confirm that you have read and understood the required risk warnings.

You should consider several factors when reviewing an offering document, including whether you can receive any income from the eligible securities and whether the business can sell new shares and reduce your percentage ownership.

Here are some key considerations to keep in mind:

Do your homework before investing, and take time to thoroughly review the business's offering document and business plan.

You can invest up to $2,500 per start-up crowdfunding offering or up to $10,000 with suitability advice from a dealer.

Non-accredited investors, which is most investors, have limits on how much they can invest in crowdfunding offerings within a 12-month period. The amount is based on income and net worth.

Here's a quick rundown of the investment limits:

Investors have a 48-hour period to cancel their investment before the offering closes.