Crowdfunding, however advantageous and attractive it may seem, is not viable for all ventures. Start-ups and emerging businesses generally find it more profitable to turn to investors through equity crowdfunding. If your desire is to be an investor, today we’re going to show you how to invest in a project wisely.

Investing in equity crowdfunding

It’s necessary to clarify that it’s not necessary to be rich to invest in a start-up. What’s necessary is to be aware of the risks, benefits and have a considerable amount of money. Equity crowdfunding, or also known as investment crowdfunding or crowd-investing, consists of an emerging business or start-up that seeks financing through multiple investors.

Contrary to traditional crowdfunding, no rewards are offered to contributors (or in this case investors). Instead, equity and shares are offered within the company. Among other benefits to which investors can opt. Taking this into account, let’s see what you need to know to make an investment in a project:

Considering the risks and myths of fraud

Equity crowdfunding is subject to law and is regulated, in contrast to its counterpart with rewards/perks. But it should be noted that even so, the risk of investing is still present. Since many of these projects seeking financing have very ambitious business models.

According to an article written by the Spanish journalist expert in start-ups Liliana Ochoa, fraud in crowdfunding has a very little presence. Adding as proof a statement from the Spanish crowdfunding consultant Valentí Acconcia: “In 2015, of the 110,000 campaigns financed on Kickstarter, 197 frauds were counted”.

crowdfunding valenti acconcia
Valentí Acconcia, co-creator of Crowddays and CrowdEasy, says that one of the investor protection systems in equity crowdfunding consists in the possibility of the community to report start-ups suspected of being a fraud. Source: Zinc Shower

This means that of the total, just 0.17% turned out to be a fraud. Which doesn’t mean that you have to lower your guard. The CEO of Crowdants, Ángel González Romero, also says in the article that evidently start-ups have a higher level of risk (and possible fraud). But he assures that “they offer more options to earn more money if they’re successful”.

Either way, depending on the country, there are laws that require equity crowdfunding platforms to protect their users. Some ask them to inform their investors when a project or start-up has a high risk. Among other measures that are applied to protect the invested money.

What do you need in order to invest?

We must highlight that this depends mainly on the country of origin and the equity crowdfunding platform in question. But to explain it in the most generalized way possible, we’ll mention two figures commonly recognized in this market: accredited investors and non-accredited investors.

An accredited investor is, according to Investopedia, an investment person or entity that meets the requirements of income, net worth, asset size, governance status or professional experience. Among these are: natural individuals, banks, insurance companies, brokers and trusts.

how to become an accredited investor
According to Investopedia, to become an accredited investor in the United States it’s necessary to have an annual income of $200,000 or $300,000 in the last two years. Or, have a net worth greater than $1 million. Both requirements can be met individually or combined with a spouse.

On the other hand, non-accredited investors are those that comply with some or none of these requirements. Those that do meet certain minimum requirements still have the possibility to invest (depending on the country, its laws and the platform). Although with some limits in between, such as an investment limit per company and an annual investment limit.

You can do paperwork to become an accredited investor, following the guidelines that are required in your country. But you can also choose to look for platforms that can accept you as a non-accredited investor and adjust to their guidelines.

Before making an investment…

If it’s your first time acting as an investor, you must know some things before investing. Never invest a higher amount of money than you’re willing to lose. Likewise, it’s not recommended that you invest a lot of money if you don’t have experience as an investor. Because you never know if the start-up will succeed for sure.

Many veteran investors say it’s important to invest in different start-ups at the same time. Since receiving the return on investment in one is very uncertain and therefore risky. However, this isn’t always the case. Warren Buffett, a legendary investor, advises choosing long-term stocks and having faith in the investments made.

warren buffett advice
Warren Buffett, an American investor and entrepreneur with more than 70 years of experience, warns that one should never invest in a business that one doesn’t fully understand. Source: 9to5Mac

To the extent possible, try to communicate in depth with the entrepreneur or creator of the start-up. You’ll want to extract as much information as possible about their idea and their business strategy. As well as clarify any doubts or concerns you may have about the project.

Finally, always evaluate the competitiveness and viability of the start-up. It doesn’t hurt that as an investor, you analyze the market where the business you intend to invest is going to play. With all that implies: the required costs, profitability, marketing plan, business model, etc. Doing all this will allow you to have more security in your investment.

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Related: How To Finance An NGO With Crowdfunding: What You Must Know

Invest wisely in start-ups!