If They Dare, Ordinary Investors can now can Buy Shares in Startups

Jeff Brown reported in Monday’s Wall Street Journal that, “In the old days, an investor hoping to get in on the ground floor of the next Google or Facebook had a couple of options: have a friend or relative on the inside, or sign on with a big brokerage firm handling the startup company’s private placement—a sale of stock that hasn’t yet gone public.

Not anymore. Ordinary investors now can buy shares in startups that are just getting off the ground, sometimes for just a few dollars. If, that is, they are willing to take on a whole lot of risk.

“It all started with the Jumpstart Our Business Startups Act in 2012. Since the act’s Title III took effect in May 2016, people no longer have to be well-to-do ‘accredited investors’ to buy into startups.”

The Journal article noted that, “Their stake can be as little as $10, or as much as they like, within Securities and Exchange Commission limits based on income. Investing is done through the soaring number of online ‘equity crowdfunding portals‘ like EquityNet, Fundable, AngelList and Crowdfunder.

But along with hopes of 100-fold gains come big downsides. Many of these startups fly beneath the radar of big venture investors who vet fledgling firms. Often, they aren’t promising enough to go public the traditional way, and they lack a track record, proven product and thorough financial disclosures. And since their shares aren’t publicly traded, it may be impossible to cash out until an exit event like an IPO or buyout, and the firm may tank while you wait.”

Mr. Brown explained that, “The 2015 Crowdfunding Industry Report by Crowdsourcing LLC’s Massolution.com, the latest industrywide data available, shows $16.2 billion raised through the various types of crowdfunding in 2014, up 167% from the year before. At the end of 2014 there were more than 1,250 crowdfunding portals world-wide, versus 850 in 2012.

Monday’s article also noted that, “For now, the lending, donation and rewards sites dominate crowdfunding. But the equity sector is only likely to grow, as more investors and entrepreneurs learn about it, says John Rampton, an experienced startup investor in Palo Alto, Calif., who has invested in a startups through DreamFunded.

“‘In the future, a lot more startups will have a chance of being successful because of the funding they can get without [the help of] the institutional investor,’ says Mr. Rampton.”

Nonetheless, the Journal article added this cautionary note: “Because of the risks, experts warn against dreams of riches. Be prepared to tie your money up for five to 10 years, and don’t bet the children’s college funds, Mr. Rampton advises, adding, ‘Nine out of 10 companies fail in the first five years.'”

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