Investing in startups has been transformed by crowdfunding, giving individuals the chance to support emerging businesses. No longer restricted to accredited investors or venture capital firms, almost anyone can now become a part-owner of a company with the potential for future returns.
Let’s delve into some of the top crowdfunding platforms and how they can be utilized for investing in small businesses.
Understanding Crowdfunding
Crowdfunding platforms serve as a bridge between entrepreneurs seeking funding and investors seeking new opportunities. These platforms offer various investment models, each with its own set of rules and benefits.
Small businesses are drawn to crowdfunding because it enables them to create buzz around their offerings while also securing essential funding. Additionally, crowdfunding provides everyday individuals with the chance to invest in promising startups without requiring large sums of money upfront.
There are three primary types of crowdfunding:
- Reward-based crowdfunding: Backers receive rewards, such as products or early access, in exchange for their contribution.
- Equity crowdfunding: Investors receive ownership shares in the company in return for their investment.
- Debt crowdfunding: Investors lend money to a company in exchange for interest payments, similar to traditional lending but with smaller loan amounts and a broader pool of lenders.
Top 5 Crowdfunding Platforms for Investors
If you’re interested in investing in early-stage businesses, here are the five best crowdfunding platforms for investors.
1. Wefunder
Wefunder is an equity crowdfunding platform that connects investors with startups in their early stages. Described as “Kickstarter for investing,” Wefunder allows investors to buy a stake in a company with the hope of future growth and increased investment value.
Investors can potentially profit from the company’s success through share value appreciation or dividends. However, it’s important to note that investing in startups carries significant risk, and there is a possibility of losing the entire investment.
On Wefunder, investors can browse through different companies, review their pitch decks, and understand their business models before making an investment. The minimum investment amount typically starts at $100.
Wefunder also offers the option to use a self-directed IRA for investing in listed companies. Investors can utilize STRATA Trust IRA for IRA contributions through Wefunder.
Investing in early-stage companies comes with risks, as highlighted on the platform’s website: “Every investment listed on Wefunder is riskier than a public company listed on the stock market.” It is advisable to invest only what you can afford to lose.
Wefunder charges investors transaction fees, including a 2% fee for bank transfers with a minimum of $8 and a maximum of $150. Credit card, Apple Pay, or Google Pay payments incur a 5.5% fee plus a flat $2 fee with a minimum of $10.
Pros
- Provides tools for tracking investments and monitoring company progress
- Low investment minimums starting at $100
Cons
- Evaluating early-stage companies can be challenging
- Returns may take several years to materialize, if at all
- High fees for credit card payments
2. StartEngine
StartEngine is a prominent equity crowdfunding platform in the U.S., claiming to have raised over $500 million for 500+ companies since its establishment in 2014. In 2023, StartEngine acquired SeedInvest, expanding its equity crowdfunding offerings.
StartEngine provides a robust platform for equity crowdfunding, allowing investors to participate with minimum investments as low as $40. With a diverse range of startups across various industries, investors can explore opportunities in sectors like technology, consumer products, healthcare, and renewable energy. StartEngine also offers tools to evaluate company performance and track investments.
Investors on StartEngine can engage in two ways: investing and trading.
Investing
- When investing in a company on StartEngine, investors purchase securities directly from the startup through their campaign page.
- Investors receive equity or debt in the company based on the specific offering.
- Investing typically involves a longer-term commitment as the company grows.
Trading
- Companies that have previously raised funds through equity crowdfunding can list their shares for trading on StartEngine Secondary, allowing investors to buy and sell shares alongside others.
- Trading offers greater liquidity than investing, enabling faster transactions, though buyer availability may vary.
Many opportunities on StartEngine are free for investors, although some companies may request investors to cover part or all of the 3.5% processing fee. Additional fees may apply for wire transfers, but ACH and credit card payments are typically free unless specified.
StartEngine also offers a premium membership, Venture Club, providing a 10% bonus on shares purchased in participating campaigns and other benefits for an annual fee of $275. However, membership in Venture Club is separate from investments and does not guarantee investment success.
Pros
- Large platform with resources for evaluating companies
- Tools for tracking performance and investments
Cons
- Lack of information on potential returns for investors
- Risk of loss inherent in equity investments
3. Fundrise
Fundrise is a popular real estate crowdfunding platform, democratizing access to real estate investments for individual investors. Previously limited to high-net-worth individuals and institutions, Fundrise enables everyday investors to participate in this asset class.
Investors can benefit from Fundrise through dividends and property appreciation. Dividends are regular payments from rental income or property earnings, while appreciation is the increase in property value over time. Fundrise offers plans focused on income, growth, or a mix of both.
However, investors should be aware that their funds may be locked in for several years, impacting liquidity. Additionally, Fundrise charges multiple fees, including a 0.15% advisory fee, a 0.85% annual management fee for real estate funds, and a higher 1.85% fee for the Innovation Fund. These fees may seem high compared to ETFs and mutual funds, which sometimes offer no-fee options.
Investors can start with as little as $10 in cash or $1,000 through an individual retirement account.
Pros
- Low minimum investment and user-friendly platform
- Diversified real estate portfolio exposure
Cons
- Lock-in period for investments may limit access to funds
- Fees may erode overall returns despite being lower than some competitors
4. Honeycomb Credit
Honeycomb Credit is a crowdfunding platform connecting local businesses with community investors.
Investors can browse business profiles on the platform, review funding requests, and support businesses by contributing to their loan. The platform typically sets a minimum investment amount of $100, allowing individuals to participate with modest sums.
Investors earn returns through promissory notes on Honeycomb Credit. By lending money to a business, investors receive fixed interest payments over a specified term (usually three to five years) at annual rates ranging from 6% to 14%. Businesses make monthly payments distributed to investors quarterly.
Honeycomb charges a transaction fee of 2.85% of the total investment amount, capped at $37.25, on each investment. However, investing through Honeycomb Credit involves significant risk, as small businesses listed may face financial challenges and potentially default on loans.
Pros
- Low investment minimums
- Higher interest rates compared to other options
Cons
- Risk of default for small businesses
- Potential lock-in period for investments
5. FranShares
FranShares, established in 2020, is a crowdfunding platform making franchise investing accessible to individual investors. By allowing investments as low as $500 in shares of profitable franchises, FranShares offers fractional ownership opportunities with established franchise brands.
Investors can purchase shares of listed franchises, becoming part-owners and receiving dividends from the franchise’s profits. Share values may appreciate with improved franchise performance, resulting in capital gains upon sale.
Income funds typically hold franchises for 10-15 years, while growth funds target a holding period of 5-7 years. Upon franchise sale, investors receive a share of the net proceeds.
Distributions to investors are made quarterly, semi-annually, or annually, depending on the offering. FranShares imposes a one-time acquisition fee of $500 and an annual fee of $100 per investment.
Pros
- Steady income stream from franchise profits
- Accessible franchise investment opportunities
Cons
- Limited control over franchise operations for investors
- Annual $100 fee
Investor Protections and Regulation of Crowdfunding Platforms
Crowdfunding platforms are regulated to protect investors. The 2012 JOBS Act introduced Title III, establishing crowdfunding provisions overseen by FINRA, which regulates U.S. securities activities.
Key investor protections on crowdfunding platforms include:
- Limitations on non-accredited investors’ investment amounts within a 12-month period based on income and net worth.
- Crowdfunding platforms must register with the SEC and FINRA to ensure compliance with securities laws.
- Companies offering securities through crowdfunding must provide detailed business, financial, and risk information in Form C.
- Investors have a 48-hour window to cancel investments before the offering closes.
While regulations offer safeguards, thorough research and portfolio diversification are essential before investing. Understanding the risks and verifying a crowdfunding platform’s registration status on FINRA’s Funding Portals page are recommended.
Conclusion
Crowdfunding platforms provide an accessible route for investors to engage with early-stage companies and real estate projects. However, these investments carry higher risks than traditional securities like stocks and bonds. Conducting thorough research, understanding platform offerings and fees, and diversifying your portfolio are crucial for managing risk. Ultimately, crowdfunding should be part of a balanced investment strategy.
Editorial Disclaimer: Investors are advised to perform independent research on investment strategies before making decisions. Past performance of investment products does not guarantee future price appreciation.