Tech Crowdfunding Investment: Use Protection

May 24, 2015

2:00 pm

The rise and rise of crowdfunding has some incredible benefits. For one, certain sites allow you to invest in stock rather than a reward scheme, making equity investment far less elite. The amount can be as low as $10 and it is an open forum for the public. It’s been a long time coming as the JOBS act was passed in 2012, but as the SEC work on finalizing the rules it seems this kind of funding is not far from booming in America.

But the downside is that most startups fail and you will probably lose your money. Unfortunately the fact remains that around 92% of startups do not succeed. Fine if your equity was $10 but if people aren’t sensible then they could lose a great deal of money. This raises the question of whether or not people are protecting themselves, and whether there are policies in place protecting the people.

The SEC (securities and exchange commission) has already voiced concerns about investors being ripped off. This is why it took much longer for these platforms to become legal in the USA.

The truth of the matter is that the general public has very little clue about equity investment – why should they? In the UK it is legal and presented to the public as if it’s as simple and subscribing to a weekly veg box scheme. Thus if the public have access alongside a lack of information then things are likely to go wrong.

The US and UK policies in place

When signing up for an equity crowdfunding site in the UK a person has to answer two simple multiple choice questions in order to qualify to join the site. If you answer the questions correctly you can sign up to the site. If you answer the questions wrongly you cannot.

The first question asks if most startups succeed, the answer is no, the second asks if investors are likely to get their money back should the company fail, answer – no.

For one, most people probably know this and still have no idea about investing. Even if they don’t know there’s a thing called Google that will answer all of our questions for us. However, if somehow an individual does answer wrongly then they are not permitted to invest.

The JOBS act was passed in 2012 to pave way for this kind of investing in the USA. But, as of yet, nothing has happened. The SEC a working on finalising the rules and regulations and business people are chomping at the bit to announce their crowd equity funding sites. It won’t be long until this is an option in the US, but the rules and regulations may still only be as helpful as those in the UK in terms of protecting investors.

The need to inform and educate potential investors

As part of a recent piece for the BBC Milo Yiannopoulos enforced the need for further policies to be put in place to protect uninformed investors – mostly from themselves. Advantage may be taken if people are not properly prepared for the fact that they are gambling and are highly likely to lose the money that they invest.

Equity crowdfunding is different to the other crowdfunding platforms in which you receive a reward for your investment. With stock and equity you are buying a slice of a company that will give you a return based upon the company’s profits. Unfortunately the rate at which startups fail is high.

Don’t rely on policies, find your own protection

Investment Quorum, a boutique wealth management service, advise that you only invest a small portion, less than a tenth, of your portfolio in equity crowdfunding. The potential for loss is very high but it can allow you to take a satisfying and hands on approach to stock investing. The important thing is that you do ask a lot of questions and do your research. Check out the market for the tech you’re debating investing in and weigh up the company’s potential.

If you’re only investing a small amount of capital in equity crowdfunding then you can’t make a too substantial a loss. People still have fun on a longshot, whether it be a new tech startup or a 100-1 horse in the races. Also as the tech industry is rapidly growing it’s probably smarter to invest in a startup of this kind than in a new trendy coffee shop.

If you find that it is a project you are passionate about it could be worth investing. Take precautions. Read the terms and conditions and most importantly do not invest money you cannot afford to lose. But fingers crossed you may have invested in the next Pebble, Oculus Rift, or 3Doodler.

 

Image Credit: Negative Space

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Simon Davies is a London based freelance writer with an interest in startup culture, issues and solutions.

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