When a company goes public — when selling shares to the public through an Initial Public Offering (IPO) — it is usually five to ten years old. This means that considerable gains have already gone to the early investors, such as angels and VCs (venture capitalists). Kind of unfair, huh? Well, to deal with this, Congress passed the Jobs Act in 2012 to democratize investments in startups. The result has been the emergence of a variety of equity crowdfunding sites.
Alexander M. Murray, Assistant Professor of Management at the University of Oregon’s Lundquist College of Business, recently spoke to InvestorPlace about such equity crowdinvesting sites:
“Several equity crowdfunding platforms leverage Regulation CF and Regulation A+ guidelines to provide entrepreneurs with a means to raise funding from non-accredited investors,” says Professor Murray. “StartEngine is a prominent platform that has facilitated equity crowdfunding rounds in exchange for common stock, convertible notes, and cryptocurrency tokens. MicroVentures and SeedInvest, as early pioneers in equity crowdfunding for non-accredited investors, also offer viable platforms for entrepreneurs to consider when determining whether to pursue this funding option.”
They are kind of like eBay (NASDAQ:EBAY). You setup an account and provide some of your financial information (such as for your bank account or credit card). You will then review different deals and make your investments.
However, these equity crowdfunding sites still may have some restrictions. For larger deals, you will need to be an accredited investor. This means you have earned more than $200,000 in income for the past two years ($300,000 for joint income). Or, you have a net worth of over $1 million (this excludes your primary residence).
“When selecting the type of equity crowdfunding offering to pursue, entrepreneurs must consider the stage of their venture and their resource needs,” continues Professor Murray. “While Regulation A+ offerings allow entrepreneurs to raise significantly more funding that Regulation CF, too much capital can result in premature scaling, hiring and complexity if entrepreneurs do not manage the growth of their ventures. This can be compounded by the fact that several non-professional investors often provide product suggestions and advice that can derail a venture’s core offering if not managed appropriately by the entrepreneur.”
OK then, so what are some of the top equity crowdfunding sites? Let’s take a look at the top five in the space:
Top Equity Crowdfunding Sites: Crowdfunder
Crowdfunder has roughly 200,000 members, with the total amount raised over $160 million. The average investment size is about $1.8 million. Because of this relatively large deal amount, the platform only accepts accredited investors.
In terms of the deals available on the platform, they tend to have a technology focus. Here are just some of them:
- Mycroft AI: This is a cool voice assistant that is essentially an alternative to Amazon’s (NASDAQ:AMZN) Alexa and Apple’s (NASDAQ:AAPL) Siri.
- My Private Circle: This is an online collaboration platform for businesses.
- Cervais, Inc: The company develops cybersecurity software for endpoints in a network.
Investors can invest in individual deals or participate in an index fund, so as to get portfolio diversification (which can be critical because of the high risks).
What’s more, the transaction payments are handled directly between the investor and the company. The company will provide the investment documents and instructions (such as for how to write the funds).
Back in 2010, AngelList started as a blog to help entrepreneurs with funding and recruiting talent. The founders, Naval Ravikant and Babak Nivi, had strong backgrounds in the tech world.
And yes, the blog took off — and eventually would turn into a crowdfunding platform. It has also become the a must-have for early-stage investors who want to find the next big thing in Silicon Valley.
Just some of the high-profile investors include: Reid Hoffman, the co-founder of LinkedIn; Dharmesh Shah, the CTO and co-founder of HubSpot (NYSE:HUBS); and Cristiano Carlutti, a former vice president at Tesla (NASDAQ:TSLA).
AngelList differs from other equity crowdfunding sites in that it lets you invest in “syndicates,” which are led by VC investors to buy into single-deal companies on the platform.
If you want to invest in individual deals, then there is a minimum $1,000 requirement. Or, if you want to be a part of the AngelList fun, then you must invest at $100,000. All investors also need to be accredited.
SeedInvest is one of the pioneers in allowing anyone to invest in early stage companies. The platform has more than 300,000 investors, and, since inception, there have been more than 200 companies that have received funding.
Now SeedInvest is not about just listing tons of deals. In fact, the company has strict criteria and accepts only about 1% of submissions.
But this does not imply that you can avoid doing your own due diligence. Keep in mind that these types of investments are very risky. So it’s important to read through the investment materials.
For an investment, SeedInvest will charge a 2% processing fee that is capped at $300. But this refunded if the company does to raise the minimum amount of capital.
When capital dried up during the financial crisis in 2008, Bill Clark stepped in to help out. He created MicroVentures to provide capital to small business. Before starting this venture, he had a successful career as a credit manager for companies like Dell (NYSE:DELL), PayPal and GMAC.
As of now, MicroVentures is one of the leaders in the crowdfunding space. There are over 110,000 investors who have funded more than 400 companies. To invest in a MicroVentures deal, the minimum is $100. You can pay with a credit card, bank account or wire transfer.
Note that Microventures has had access to marquee deals. This is primary because it allows for secondary trading (this means you can buy shares in a startup from other holders, say employees).
According to the CEO and founder of WeFunder, Nick Tommarello, “I started Wefunder because I wanted to invest in my friends — to help them dream bigger, be the best versions of themselves, and reach their ambition. Seven years later, we do that for the rest of America.”
He has certainly done a great job in realizing his vision. His platform has funded more than $125 million in investments. Actually, a large amount of this has been available for any investors.
The average deal raises about $300,000. And some examples include Mevo (a camera designed for streaming live events) and Everydae (a digital tutoring app).
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.