It’s a new world for investors. You can now invest small amounts online in private companies (or even in people) without leaving your house, writing a check, or even talking to anyone from the company. This is a great opportunity for investors to participate in opportunities previously only available to the very wealthy and also diversify from public stocks. Here are some things to keep in mind while navigating the online investing world:
1) Variety of Options. There are a variety of options out therefore new alternative investments, including investing in students (Upstart), athletes (Fantex), Consumer Products (CircleUp), technology startups (SeedInvest), Real Estate (Fundrise), consumer debt (Prosperor Lending Club), and much more. Pick verticals that you know something about and diversify appropriately.
2) Use a Reputable Platform. Using a reputable platform can serve as a key protection against fraud. Be careful to choose a platform with a history of closing deals, however, as hundreds of new platforms with no track record are popping up. Read the fine print at the bottom of the platform’s website to determine whether they are working through a registered broker-dealer or investment adviser.
3) Pay Attention to Fees. Some platforms, such as AngelList and FundersClub, charge fees to investors in the form of 20-25% carried interest and/or 5% in expenses, taking a big chunk out of your upside. Other platforms, such as SeedInvest and CircleUp, are free to investors and charge fees only to companies.
4) Accredited Investor Status. Most deals today are only available to accredited investors, generally meaning that you must earn over $200,000 per year (or $300,000 jointly with your spouse) or have over $1M in net worth (excluding your house). Later this year, when new crowdfunding rules go into effect, regular people will also be able to invest in certain offerings, but you will be subject to maximum investment amounts (typically between $2,000 – $5,000 over a year).
5) Personal Information. Be careful with your personal information. Make sure your platform has proper privacy and security protocols (look for seals such as McAffee, TrusteE, and Norton). Some deals may require you to prove that you are an accredited investor and turn over tax returns or other personal financial documents. It’s best if you can get your lawyer or CPA to vouch for you, then you can skip this process.
6) Beware of Cold Calls. Be highly skeptical if you receive unsolicited phone calls or emails about a securities offering, particularly if it is not being conducted through a reputable platform. See Wolf of Wall Street, Boiler Room, etc.
7) Strength in Numbers. Consider joining an angel investor group, like TiE Angels or Seattle Angel Conference where you can work together with other investors on diligence and deal flow. The Angel Capital Association is a great resource to learn more about angel groups.
8) Start Slow. If you are new to investing, consider starting slow. Many platforms allow investments as low as $1,000 and later this year will likely allow investments as low as $100.
9) Do your Diligence; Read the Deal Documents. Just because a deal is listed on a platform does not mean you shouldn’t do your own diligence. Participate in online webcasts and discussions, review deal documents and diligence materials carefully before making an investment.
10) Don’t be the Only Investor. Make sure the platform has protections like an escrow or minimum closing amounts so that you don’t invest in a company that isn’t successful in hitting its fundraising target.
11) Non-U.S. Investors. Non-U.S. Investors generally can participate in these offerings though the logistics may be more challenging. To avoid these troubles, consider “on-shoring” funds in a U.S. corporation.
12) Educate Yourself. There are a lot of materials out there to help you become a savvier investor. Check out the Angel Resources Institute, Quora, and SeedInvest’s Blog to get started.
What else should online investors consider?
For the entrepreneur’s perspective, check out our previous post, Equity Crowdfunding Rules: 15 Things Every Entrepreneur Needs to Know Now.
Kiran Lingam is the General Counsel for SeedInvest
The information herein is not a substitute for professional legal advice and is intended to facilitate discussion with legal counsel. Nothing herein shall create an attorney-client relationship, nor is it a solicitation to offer legal advice. If you ignore this warning and convey confidential information in a private message or comment, there is no duty to keep that information confidential or forego representation adverse to your interests. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your rights.