How does equity crowdfunding differ from the stock market?
Investing in Startups through crowdfunding is different than investing in the stock market. Here are some main differences:
Risk/Reward: Startup investing is considered a much higher risk than the stock market, but there’s also the potential for higher than average returns in early stage companies if they succeed (e.g., if they are acquired or go public). As in every investment, there is no guarantee of outcome or return. Startup investment can be fun, but most will not succeed. Read more on Startup investment risks here.
Information & Reporting: Public companies are required to file annual and quarterly reports disclosing operational and audited financial information. Private companies preparing for a crowdfunding campaign must disclose less information.
Startups must file the SEC’s Form C (more ) to qualify for raising equity crowdfunding. It is essentially a business plan with two years of financials that may or may not be independently audited, depending on the amount of funding the Startup intends to raise (lower funding targets require less independent review of financials). At the end of an equity funding campaign, the Startup must publish a Form C-U (“U” for update) to disclose the amount of funds raised and securities sold. After that, the Startup must file at least one annual report including financial updates.
All information for crowdfunding campaigns is shared electronically, usually by email or a web link; you will not receive printed reports. Also, stock certificates are only available online, in an electronic format.
Cost to Invest: When you buy public stocks, you may pay a fee per trade or a percentage to a broker. But you can invest in private Startup companies on Fundify at no charge. For our part, we only collect a success-based fee from Startups that successfully raise their crowdfunding target amount. More on Fundify’s fees and business model here.
Liquidity: In the stock market, you usually can sell stocks easily and quickly. In contrast, crowdfunding investments are not as liquid. By law, you must hold the investment for one year. Even then, it may be difficult to find a secondary market in which this investment can be sold. Investing in private companies is a long-term investment strategy (often five years or more), and Investors usually hold private equity until the Startup reaches a successful exit (e.g., through an IPO or acquisition) or it closes. More on Startup investment risks here.
Passive Investor: When you invest through equity crowdfunding, you become a minority owner in the company. That means you will not have voting rights and will not control the daily operations or future direction of the company.
Private equity investments can be an important part of a balanced portfolio. We do not recommend that you invest only in private equity or only in only one Startup. Research studies suggest that investing less in several Startups companies is a better approach to achieve a balanced portfolio. This type of balanced approach gives you the potential for benefitting from a potential future upswing while also mitigating your risk.