Crowdfunding platforms such as gofundme and Kickstarter have made headway as vehicles allowing millions of people to realize their financial goals. Whether it’s paying for the surgery of a beloved pet, or raising capital to make the movie of your dreams, these instruments of fundraising have revolutionized the moneymaking process. It was only a matter of time before this type of platform was utilized for start-up businesses to connect with investors. But what is crowdfunding and who is it for? Here is a concise guide to help you understand this newest phenomenon.
How Does It Work?
Securities crowdfunding is a way for individuals to invest in different financial opportunities that were previously unavailable to them. Small businesses seeking funding, as well as organizations that are just getting started, put up a request for funding from a large pool of investors. Instead of seeking an angel investor or venture capitalist who donates a large sum, smaller sums are sought that would be the equivalent of what one shareholder would previously put up. Chances are offered via registered broker dealers, with the platforms acting solely as the conduit.
What Are the Benefits?
Both the businesses/startups looking for funding, as well as the likely investors, can greatly benefit from securities crowdfunding. Entrepreneurs can prosper because they have a much larger pool of potential donors. Risks are minimized because of the number of shareholders and the lower buy-in amounts. Businesses can also receive advice and interest from their backers if they work at engaging them.
Investors make gains as well. Shareholding opportunities such as those in real estate, venture capital, and hedge funds were previously limited to those with millions of dollars in assets – these channels are accessible with this type of fundraising. For example, a real estate investment club that formerly required a minimum buy-in of $100,000 might be reachable to you with $5,000. Individuals looking to grow their money could buy into private securities and the initial public offering (IPO) equivalent of start-ups. If you get in at the ground floor of a company’s growth, you receive the associated perks including stock sales et al. If the company does well, you can potentially make huge gains in your portfolio.
Who Can Take Advantage of This?
Currently these shareholding opportunities are limited to accredited investors, those deemed by the Securities and Exchange Commission (SEC) to be sufficiently capable of handling the risks involved. Government regulators understand that the potential for mistakes to be made, at least initially, is high as the companies get started, and they want to make sure that those who take the losses can afford to do so. Eventually this investment platform should be available to all who are interested and have sufficient capital.
What to Be Aware Of
It’s important to remember that investments are a risk and, as with any place you put your money, research and careful thought are necessary in order to mitigate the potential losses. However, if you have sufficient resources and enough interest, the conceivable benefits of securities crowdfunding are definitely worth exploring.
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