Equity Crowdfunding has been exploding in popularity for both companies and investors all over the world. Equity crowdfunding does not only help the crowd to drive and fund innovation but also helps entrepreneurs’ businesses to start and grow.
In 2015, AltFi and law firm Nabarro carried out a study on 367 companies that had been funded through equity crowdfunding websites. According to the research, 302 companies were still trading but it was not clear whether their value had increased, one company had been acquired by Europcar , 58 companies had gone on to raise more money at a higher valuation, 29 companies had gone out of business and 41 companies could not be reached, either by telephone or via their websites.
If we add together the companies that went out of business and those that could not be reached, that means 70 out of 367 companies had lost investors’ money. Using that data, we can estimate that 20% of startups funded through equity crowdfunding do not reach maturity.
Having seen that some companies funded through equity crowdfunding succeed while others fail, let us look at different types of risks that investors need to know before they write their first check.
1) Loss
It is possible for a company to lose value or go bankrupt. Most businesses that seek funding through crowdfunding are early-stage ventures or start-ups. Statistically, many of these companies do not survive past five years. If investors invest in start-ups that do not succeed, they may lose all the money they invested.
2) Liquidity
With stock, investors can sell at their leisure. With equity crowdfunding, investment is locked in and one can’t get it for years. It is difficult to resell your shares in the company you invested in.
3) Fraud
There is a lot behind the curtain. Although regulators that oversee the public stock markets are working to minimize fraud in the equity crowdfunding industry, investors need to be careful.
4) Lack of information
Investors should expect to get less information about their investment than they would with traditional investment products. Companies raising fund via equity crowdfunding are not required to give the same amount of information as a public company. Investors only receive less information such as annual financial statements and notices about key events.
5) Limited legal rights
These investments are not approved or reviewed by a securities regulator. Investors don’t have same legal rights that they would have had if they purchased under a stock exchange.
With equity crowdfunding marketing statistics and risks involved, you can decide whether investment in equity crowdfunding is for you. Every investment decision should be thoroughly researched and carefully considered in advance. Equity crowdfunding is one of several potential investment options. However, always remember there are no guarantees. Never invest money into a company you can’t afford to lose entirely.
