Investment Risks

In 2012, after decades of being shut out from private equity, individual investors on Main Street were ushered back into the private sphere. The catalyst came in the form of the Jumpstart Our Business Startups (JOBS) Act, signed by then-President Barrack Obama. The JOBS Act popularized crowdfunding. Sites like Kickstarter flooded the internet, asking for financial backers in return for perks and rewards, like early access or exclusivity. It wasn’t until 2016, when Title III of the JOBS Act allowed for what we know as Regulation Crowdfunding, that the equity crowdfunding revolution was born.

Investing in an equity crowdfunding campaign should be thought through well and requires a high-level understanding of the associated risks and costs. Yes, more investors are involved at relatively low dollar amounts each (as opposed to a few wealthy venture capitalists). But, no, this doesn't mean you shouldn't still proceed with caution. Here are the key elements you can keep in mind while getting started.

Crowdfunding refers to raising money from the public (i.e., the "crowd"), primarily through online forums, social media, and crowdfunding websites to finance a new project or venture. Equity crowdfunding takes this one step further. In exchange for relatively small amounts of cash, public investors get a proportionate slice of equity in the business venture.

It is important to be able to identify and address startup investment risks before making an investment. Here is a breakdown of the main types of risks you should be aware of.

Crowdfunding investments are risky and speculative. You should do your own research and scrutinize all disclosed risk factors before making an investment decision.

All investors need to evaluate which investments are right for their financial situation. While this article presents things you may want to think about when determining your risk tolerance, we do not offer investment advice; it is up to each investor to speak with your financial advisor and evaluate each investment opportunity for yourself.

Just how risky are startups? How can I decrease the risk? How many investments should I make? Is an equity investment appropriate for me? Is a debt investment appropriate for me? Can I easily resell my investment? Will my percentage ownership be diluted?