Getting to Know Crowdsourced Investments: The Era of Collective Funding
Crowdsourced investment, or crowdfunding, has changed the nature of investing and financing different projects and businesses. Rather than going through traditional channels such as banks or venture capitalists, crowdsourced investments enable people to bring their money together and invest it in startups, real estate, projects, or even small businesses. This type of collaborative financing has been very popular and has made it easier for common people to participate in investment activities. This post will discuss the most important principles, advantages, and disadvantages of crowdsourced investing and how to participate.
1. What is Crowdsourced Investment?
- Definition: Crowdsourced investment describes the process of raising money through collecting small funds from a mass of people through internet-based services.
- Crowdfunding vs. Crowdsourced Investments: Though crowdfunding is mostly geared towards funds mobilization for not-for-profit projects or individuals, crowdsourced investments are based on people mobilizing funds to seek financial return potential.
Forms of Crowdsourced Investments:
- Equity Crowdfunding: Shares are purchased in a company or business by the investor in place of equity for potential profits when the company achieves success.
- Debt Crowdfunding: Otherwise referred to as peer-to-peer (P2P) lending, this is where people lend money to companies or individuals with the hope of getting their principal amount back plus interest.
- Real Estate Crowdfunding: Investors contribute funds to buy real estate properties and earn income in the form of rental returns or capital gains from selling the properties.
2. How Crowdsourced Investment Platforms Work
- Investment Platforms: Crowdfunding investments are usually listed on online platforms such as Kickstarter, Indiegogo, SeedInvest, Fundrise, or RealtyShares.
- Project Listings: The platforms contain projects, start-ups, or real estate investments in search of capital. The investors can then sift through these listings and decide where they’d like to place their funds.
- Investment Sizes: Depending on the site, investors can invest anywhere from $50 to thousands of dollars in a project, making it possible for more individuals to get involved.
- Returns: Investors receive a return on their investment in the form of dividends, interest payments, or a percentage of the profits, depending on the type of crowdsourced investment.
3. Advantages of Crowdsourced Investments
Access to Alternative Investment Opportunities: Crowdsourced investments offer access to a range of investment opportunities that are not accessible through conventional means, including startup equity or real estate ventures.
- Lower Entry Barriers: Conventional investing tends to demand significant amounts of money or accreditation to join. Crowdsourced investment enables people to begin with relatively small amounts, making it more inclusive.
- Diversification: Because investors have a variety of projects to pick from, crowdfunding provides a chance for investors to diversify their portfolios and reduce risk. They can distribute their funds in different investments, sectors, or industries.
- Participation in New Ideas: Crowdsourcing provides an outlet for investors to finance innovative ideas and projects, such as new technologies, new businesses, or social causes. It gives investors a feeling of participation in these ideas’ development.
- Potential for High Returns: Particularly in equity crowdfunding, initial investments in early-stage startups can return substantial gains if the business is a success. Such high-return potential has drawn many individual investors.
4. Dangers of Crowdsourced Investments
- Lack of Liquidity: Crowdsourced investments, particularly in startups and property, tend to be illiquid. Investors might not be able to exit their investment or withdraw their funds for years, depending on the project.
- High Risk of Loss: Most crowdfunded projects or startups default. There’s a chance to lose the total investment, particularly with early-stage companies or risky projects.
- Regulatory Risks: Crowdsourced investments are also exposed to changing regulations, and not every platform or investment option is regulated sufficiently. This puts investors at risk of being scammed or exposed to legal hazards.
- No Return Guarantee: In contrast to direct investment in mature companies, crowdsourced investment does not promise any return. The investor can earn nothing on the investment or lose the initial capital.
- Due Diligence: Oftentimes, the responsibility falls on the investor to do due diligence before making an investment. Platforms usually give minimum information, and the investor has to dig deep into the project, team, and business model prior to investment.
5. Most Popular Crowdfunding Investment Sites
- Kickstarter: A crowdfunding site mostly reserved for creative projects, Kickstarter provides backers an opportunity to donate money in return for rewards, either products or experiences.
- Indiegogo: Similar to Kickstarter, Indiegogo is well-known for financing creative projects but also provides equity crowdfunding options through which backers can invest in startups for a portion of the company.
- SeedInvest: SeedInvest is equity crowdfunding focused, allowing investors to buy shares of early-stage companies. It’s a great means of entering the tech and other fast-growing sectors.
- Fundrise: Fundrise provides real estate crowdfunding, allowing investors to combine money to invest in property ventures. The site allows effortless diversification of investments in the property market.
- LendingClub: A debt crowdfunding expert, LendingClub brings borrowers and investors together so that individuals can lend and receive interest in return.
6. How to Get Involved in Crowdsourced Investment
- Select the Suitable Platform: Find out about multiple platforms to choose one that will fit your goals of investment as well as risk tolerance. Be sure to evaluate the nature of projects, reputation of the platform, and likely returns.
- Understand the Terms: Before investing, read through the terms and conditions of the investment. Know the potential risks, the project’s business model, and the expected timeline for returns.
- Start Small: If you’re new to crowdsourced investments, begin with a small investment to test the waters and get comfortable with the process.
- Diversify Your Investments: Spread your investments across several projects or platforms to minimize risk and maximize the opportunity for earning returns.
- Monitor Progress: Keep an eye on the progress of your investments and keep yourself informed with any news or developments from the project or company.
7. Legal and Tax Considerations
- Tax Implications: Earnings from crowdsourced investments, such as dividends, interest, or capital gains, are subject to taxation. Be aware of how these earnings are taxed based on the type of investment.
- Regulatory Compliance: Crowdsourced investments are regulated in different ways depending on the country or region. Ensure that the platform you’re using is compliant with local laws and regulations to avoid potential legal issues.
- Fraud Protection: Make sure that the platform is equipped with measures to safeguard against fraud. Opt for secure payment options and ensure the project is genuine before investing.