New Sites Offer Individuals Opportunities Long Available Only to Institutions
Many investors wait to hear from their broker, banker or another in-the-know professional to find out about compelling but little-known investment opportunities.
But these days, a growing number of investors are finding them on their own, thanks to crowdfunding sites that help investors identify off-the-beaten-path possibilities, including equity stakes in companies, film productions and real-estate projects.
Many of these sites focus on a certain sector. For instance, CrowdStreet Inc., Sharestates LLC and Loquidity LLC specialize in securing funds for residential or commercial real-estate projects, while other sites cater to investors interested in movie productions (Junction Investments Inc.), startups (FundersClub), small businesses (Funding Circle Ltd.) or early-stage consumer-goods businesses (CircleUp Network Inc.). In some cases, investors can filter their options by selecting specific geographic or product areas they might be interested in.
Whatever their focus, though, these sites share a common goal: to connect investors with opportunities that were once hard to gain access to because they were often only open to institutional investors.
A Growing Field
The sites began to launch after passage of the JOBS Act of 2012, which allowed companies with less than $1 billion in annual revenue over the past fiscal year to seek funds from the public and, more recently, allowed private companies to publicly advertise their fundraising efforts.
But the deals on these sites aren’t open to everyone. Only accredited investors as defined by the Securities and Exchange Commission typically are permitted to participate for now. That includes those with an individual or joint net worth with a spouse of at least $1 million excluding the value of a primary residence, or those with individual income exceeding $200,000 or joint income with a spouse exceeding $300,000 in each of the past two years, with a “reasonable expectation” of the same income in the current year.
There is a provision in the JOBS Act that would allow any investor to participate in equity crowdfunding, with limits on the amount that could be invested, but that provision can’t take effect until the SEC enacts rules governing such investments. Meanwhile, in anticipation of a broader investor base, more sites continue to go live in an attempt to build an early following of investors.
“Many platforms are cropping up in preparation for the market opening,” says Kim Wales, founder and chief executive of Wales Capital, a New York-based consulting firm, and CrowdBureau, a research company she is launching that will rate crowdfunding companies.
For Kevin Park, who has invested in three consumer-goods companies through CircleUp, the biggest advantage of the crowdfunding sites is the amount of information they provide on the companies that are seeking funding.
“A lot of times when you meet a company and you’re interested, you’re trying to ask for a business plan, financials and what you think the valuation is,” says Mr. Park, founder and managing partner of Simplepitch, a venture-capital firm that invests in early-stage companies. “These are all things that delay a transaction, or might be an area where the transaction gets cut off” if the information isn’t easily available.
Each site establishes its own criteria for minimum investments, which can vary not only from site to site but also among the opportunities on each site.
The sites typically don’t charge investors fees; they earn revenue through the companies that advertise on their platforms. Some sites offer perks to try to sweeten some deals. For example, Junction Investments, where investors back movies that typically cost between $10 million and $50 million to produce, says it offers tickets to premieres and visits to film sets for some deals.
There is one big caveat in using these sites: The deals they offer typically are high-risk and illiquid.
“Many of them are going to be fairly early-stage companies,” says Daniel Gorfine, director of financial-markets policy and legal counsel at the Milken Institute, an economic think tank in Santa Monica, Calif. “There’s an expectation of relatively high failure rates,” he says.
And even when companies or projects succeed, it can be a long time before investors reap the rewards. Investors who lend money usually receive regular interest payments—as long as the borrower remains viable—but that’s not the case for equity investors.
At CircleUp, around 40 companies have raised more than $50 million, and their annual revenues have been growing, on average, about 80%, says Rory Eakin, CircleUp’s co-founder and chief operating officer. But he adds that investors should expect to wait four to six years before they see a return on their money, which usually only happens after a company buys out early equity investors, sells stock publicly or is acquired.
Jeff Bishop, who has spent roughly $250,000 this year backing three companies through equity-based crowdfunding sites, sees his positions as long-term investments. The Durham, N.H., resident, who runs stock-trading newsletters and uses both CircleUp and FundersClub, says his companies might pay dividends if they perform well financially. But he adds they’re more likely to pour any available capital back into their businesses in the early days. “You’re shooting for an IPO or a buyout,” he says.
“If I have to pull my money out tomorrow, I’m out of luck,” he says.