Equity crowdfunding is fast gaining popularity as an investment option with a potential for outsized returns. In this post, we will discuss the pros and cons of equity crowdfunding as an investment option
Pros
Access to Early gains: Non-accredited investors traditionally had to wait until a company went public before they could invest. By then, most of the early gains to be had were taken. Equity crowdfunding makes it possible to buy a stake in the companies at the earliest of stages, thereby improving the chances of receiving a lower price for the shares offered, and getting bigger potential rewards in the future. If you are lucky, you can end up funding the next Unicorn, which will be no less than a lottery
Boosts the Startups and SMEs: Equity crowdfunding allows innovative businesses to launch and scale, and creates new jobs. You get the satisfaction of playing a role in boosting the startup/SME ecosystem, which ultimately results in the strengthening of the economy
Tax Benefits: Governments of many countries recognize the positive role played by equity crowdfunding in uplifting and startup and SME ecosystem, and thus reward investors with tax benefits for investing in equity crowdfunding platforms
Availability of Good Portals: As the market for equity crowdfunding is expanding, most of the nations have several good portals that conduct proper due diligence before allowing startups to post their projects, and have a range of security features, making equity crowdfunding safe
Cons
High Chances of Failure: Most of the firms that rely on crowdfunding are either raising their first funding round or are in their early seed stage, making them riskier than startups that have already proven their ability to attract capital. This asset class is thus not suitable for conservative investors or investors with low tolerance toward risk
Difficult to Protect Interests: Unlike the public market that usually has a few investors holding a significant quantity of shares and thus have voting rights, crowdfunded startups have thousands of backers, none of whom have enough clout to adequately lobby for their interests
Due Diligence is Difficult: Most equity crowdfunding investors are less sophisticated with limited skills for due diligence. As the reporting/filing rules are much less stringent for startups raising equity crowdfunding, due diligence becomes even more difficult, making these investments inherently riskier
Lack of Secondary Trading Markets: Unlike public equity that can be traded any time by booking a profit/loss, there are no such markets for private equity available in most countries, which means that the investors have long, undefined, lock-in periods for equity crowdfunding investments until a liquidity event happens
Long Waiting Periods for Equity Issuers’ Liquidity Events: It can take years for the equity crowdfunded company to realize its potential (if it ever happens at all). There are no defined periods, and it can sometimes take five to seven years