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How to Invest in Private Companies to Expand Your Investing Horizons

Investing in private companies is another way for wealth creation adding diversification to your investment portfolio

A few years ago, the JOBS Act made investing in private companies easier for non-accredited investors. Its main goal was to support the funding of small businesses and the business activity of small companies or startups which, until then, had little access to fundraising capital via sources other than traditional banking. So because it is much easier today, with plenty of investment opportunities, let’s discuss how to invest in private companies today and several high risks to consider.

Gold and silver gears with the words "private equity" written on the gold gears.
Source: Pavel3d/ShutterStock.com

The JOBS Act made crowdfunding a great tool for businesses and entrepreneurs to raise capital. It let them bypass the option of traditional financing via the banking system.

According to an article from RealtyMogul, “To encourage economic growth after the Great Recession, the JOBS Act was implemented to allow private startups and small businesses to use crowdfunding platforms and publicly raise investment capital. According to the U.S. Securities and Exchange Commission (SEC), ‘The final rules makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that: the issuer takes reasonable steps to verify that the investors are accredited investors; and all purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule.’”

Title III of the JOBS Act went into effect on Nov. 16, 2015. While this allowed non-accredited investors to get involved in crowdfunding, it also limited the maximum amount to $1 million over the course of 12 months.

Where to Find Information About How to Invest in Private Companies

There are many sources on the internet you can visit to get informed about equity crowdfunding. Some popular investment platforms to search for individual offerings are:

You can also find opportunities for private investment by paying attention to Microsoft’s (NASDAQ:MSFT) LinkedIn, the largest business professional network, or by monitoring search engines for press releases.

The startup ecosystem is expanding rapidly, which makes investing in startups much easier. Many companies advertise their private placement offerings on LinkedIn and publish press releases to reach mass media circulation. They present their fundraising goals to investors not only in the U.S., but also around the globe.

Factors to Consider

While the goal of investing in private companies is to buy shares at the early stage of growth (and at a low price) to profit from the future growth, there are many upsides and downsides to consider.

The most notable advantages for private placement investments are:

  • Diversification, as the stocks of the private companies are not listed on the stock market.
  • The minimum amount of investments is typically small and can be as low as $1.
  • Ease of use, as you can search for companies in various business sectors anytime, anywhere.
  • You can to due diligence and transparency, as the legally required documents are published and are at your disposal. This helps you clearly understand the terms and conditions of the investments.
  • In most cases, the private offerings close only when the minimum goal of capital raised is reached. In cases where it does not hit that minimum, then the investment is returned to you.
  • Several investment platforms publish founder stories, which can be useful to evaluate the business opportunities. After all, you not only invest in companies but in the management team and their experience as well.
  • You can manage and track your investments on some platforms.
  • Almost every company builds its community online, so you can get in contact with other investors and ask questions.
  • Many companies offer perks related to the amount of investment, and these perks can be discounts or even first access to new products.

Most Common Risks About Private Investing

As I mentioned, there are also plenty of risks associated with private investing. A few of the main ones to keep in mind are:

  • Investing in private companies is much riskier than investing in publicly traded companies, as the startups have a short history of financial performance to evaluate.
  • As with many investments, you could lose your capital.
  • You may face strong illiquidity until stocks go public.
  • In most cases, there are no dividends paid.
  • There is the risk of dilution if the companies decide to have several other fundraising rounds in the future.

If you understand fully these risks and consider private investing to be part of your diversified portfolio then you can check and monitor other alternative investment opportunities in private companies. Understanding these risks is not only essential but also practical for other issues such as tax treatment purposes. On all the mentioned investment platforms, these investment opportunities are not investment recommendations. It is up to you to decide whether to invest or not after due diligence and measuring the merits and risks.

As of this writing, Stavros Georgiadis did not hold a position in any of the aforementioned securities.

Investing through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:

1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education

Read more: Private Investing Risks


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/how-to-invest-in-private-companies/.

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