Your First Crowdfund Investment - dummies

By Consumer Dummies

Congrats, you’re ready to commit to your first crowdfunded investment! Just remember: committing your money to a crowdfund investing campaign doesn’t lead to instant equity that immediately starts increasing or decreasing in value.

If you want to buy stock in a public company, you can go to your online brokerage account (with Fidelity or Vanguard, for example) and purchase that stock in real time. You can also purchase exchange-traded funds (ETFs), which are bundles of stocks or other securities, in real time. You simply log in, do your research, and purchase the stock or ETF. When you buy stock or an ETF on the New York Stock Exchange or the NASDAQ, you’re purchasing on the public stock markets: places where buyers and sellers know they can meet and trade stocks at publicly available prices. If you decide tomorrow that you no longer want that stock or ETF (it now reminds you of a certain pair of eggplant-colored pants hanging in your closet), you can sell it just as easily, although the price likely will have fluctuated even in the single day since your purchase.

When you decide to purchase equity shares or debt through a crowdfund investing campaign, the entire process is different. You aren’t sending your money into a public stock market. You’re not interacting in a place where lots of buyers and sellers congregate, ready to do business. Instead, you’re sending your money to one start-up or small business. (As you find out, you’re actually sending the money to a middleman called an escrow agent who holds the cash until the crowdfund investing campaign is complete, but that’s getting ahead of the game here.)

In addition, you take this step knowing that you’re making a commitment of at least 12 months (per the JOBS Act legislation). You’re making an illiquid investment, which means you’re putting your money into something that can’t be turned back into cash quickly or easily. When you’re completely comfortable with the level of commitment required here — you have the engagement ring in hand and are ready to bend your knee — it’s time to invest.

Pledging your amount on the funding portal

When you’re ready to pledge your funds to a crowdfund investing campaign, you log onto the online funding portal that supports this particular campaign. Here are the steps you’ll most likely take next:

  1. Register with the portal.

    You provide your name and preferred contact information.

  2. Take the investor quiz.

    This quiz determines whether you’re an educationally accredited investor (translation: you understand what you’re risking by pursuing a crowdfund investment). Don’t stress: The quiz really isn’t very difficult as long as you have realistic expectations about crowdfund investments.

  3. Accept the crowdfund investing portal’s disclosure statements.

    Doing so verifies that you understand the risks of investing in start-ups and small businesses.

  4. Input your checking account, savings account, or debit account number.

    A credit card won’t fly when you’re making this type of investment. You can’t use a credit card to buy public stock on an online brokerage account, and you aren’t allowed to use a credit card to make crowdfund investments either.

    Why the restriction? Because a credit card purchase can be disputed, which can interrupt the business funding process. Using a credit card creates the possibility of a phantom transaction. You must buy stock and make crowdfund investments with real money that you actually have in an account.

  5. Specify how much you intend to invest.

    The amount you choose must be above the minimum established by the campaign and below your maximum allowed by the JOBS Act. Where you fall in the middle of those two numbers is up to you, your financial portfolio, and your investment advisor (if you have one).

  6. Start signing.

    Buying crowdfund investments isn’t as easy as simply hitting the purchase button. There are also documents like a subscription agreement, which summarize and standardize the offering. In other words, you’re buying a certain number of shares at a certain price and those shares come with specific rights. You need to review and sign these documents.

Going into escrow until the campaign is complete

After you follow the steps outlined in the preceding section, your money is transferred to what is known as an escrow agent. If you’ve ever bought a house, you’re likely well versed in the concept of escrow. If not, escrow is fairly easy to understand.

In crowdfund investing, the escrow agent is a neutral third party — a company that holds investors’ cash, as well as the shares of the company, in trust. When the conditions of the sale are met — in this case, the crowdfund investing campaign reaches 100 percent of its funding target — the escrow agent releases the cash to the seller of the stock and releases the stock to the buyers (the investors). If the conditions of the sale aren’t met — the campaign fails to reach 100 percent of its funding target — the escrow agent returns the money to the investors.

The escrow process is a safety check: It eliminates the risk of paying for stock and not receiving what you pay for. The JOBS Act legislation states that a funding portal cannot be an escrow agent; it can’t hold investors’ cash. Funding portals don’t carry insurance to guard themselves against potential fraud or failure with investor money; escrow agents do.

Assuming that the crowdfund investing campaign is a success, the last step of the process is for the escrow agent to transfer stock certificates or debt notes to the investors and wire the funds to the company’s account. (These certificates or notes are electronic; don’t expect to receive hard copies in the mail.) At that point, you are officially a private equity or debt investor!