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Crowdfunding investments have gained popularity in the past couple of decades as they have become a great alternative to investors whose net worth or available investment budget is not high enough to secure a seat at the table on some attractive opportunities in the marketplace.
Technology and financial innovation have partnered to facilitate the creation of vehicles through which money from different parties can be pooled. As a result, many opportunities that were only accessible to the richest cohorts are now available to retail investors.
In this article, we discuss the topic of crowdfunding investments by digging deeper into how this methodology works, what its benefits are, and which platforms are the most reliable for investors to start pouring capital into some of the most attractive opportunities out there.
What Is a Crowdfunding Investment?
Crowdfunding investment is a practice that consists of gathering money from a group of investors to finance the acquisition of an asset that is expected to produce a return in the future.
The word “crowd” typically refers to a large number of people rather than a small group. By putting down only a fraction of the required financing, investors can participate and get exposure to the asset’s risk and returns.
In most cases, there is an intermediary who structures a legal entity — typically a for-profit company — that will ultimately own the asset. This party plays the role of a sponsor of the deal and raises the required funds to ensure the operation goes through.
Every investor receives a certain number of shares in the company that owns the asset corresponding to the amount they have invested, and they also receive the proceeds from the investment corresponding to their percentage of ownership.
Equity crowdfunding consists of purchasing an asset that is securitized into a vehicle whose shares can be sold to investors. By doing so, investors are entitled to receive compensation for their investment in relation to their respective percentage of ownership.
How Equity Crowdfunding Works
Equity crowdfunding involves the securitization of an asset so it can be owned by a group of investors instead of just one. The most common vehicle used for this purpose is a limited liability company whose shares are sold to investors who want to participate in the deal.
A platform or a sponsor is typically in charge of structuring the deal. Many assets can be owned via equity crowdfunding such as real estate properties, fine wine, art, land, or even intellectual property.
Benefits of Equity Crowdfunding
- Investors can use it to further diversify their investment portfolios by contributing only a portion of the total investment required.
- Compensation can come in the form of either capital gains or dividends.
- It allows investors to access certain opportunities that would be otherwise unavailable — i.e., startups.
- The underlying asset has a tangible value, and investors have a claim on it via the shares they have received in the holding company in exchange for their investment.
Risks of Equity Crowdfunding
- Some investments may be a bit illiquid depending on market conditions and how large the audience of prospective investors is for that particular asset.
- The platforms that usually arrange these investment schemes charge a fee that will come out of the investment’s proceeds — if any.
Best Equity Crowdfunding Platforms
There are a number of equity crowdfunding sites available to investors across the United States. All of these platforms take full advantage of the JOBS Act and Regulation A+, which aim to level the plain field in this space and allow retail investors access to private equity investment opportunities.
Wefunder is a platform through which non-accredited investors can get exposure to early-stage companies — also known as startups — with as little as $100. The company has progressively become the go-to place in this space due to its competitive fees and user-friendly interface.
All of the investments can be completed online, and commissions start at 2% of the initial investment, capped at $100 per transaction. Since its launch, Wefunder claims to have funneled over $500 million in capital to small businesses and startups in the country from a pool of nearly 1.6 million investors.
Founded in 2014, StartEngine has been helping entrepreneurs and startups in raising capital for their businesses by allowing them to access a pool of both accredited and non-accredited investors across the country who can participate in the projects with as little as $100.
StartEngine charges a 3.5% fee per transaction and a 5% fee for investors who would like to sell their equity stakes via the platform’s secondary market. One of the platform’s most prominent backers is Kevin O’Leary, the billionaire ex-founder of SoftKey and a well-known figure in the venture capital space for his participation in the popular TV show Shark Tank.
Republic is a large crowdsourcing online equity investment platform with over 2.5 million registered members, including individual and institutional investors. The company claims to have facilitated the completion of over 600 deals worth over $900 million.
In addition, the platform has diversified its services to incorporate opportunities in the real estate, crypto, and gaming industries. Republic claims to have a success rate of 90% since it was launched in 2016, and it charges a 6% platform fee per transaction. The minimum deposit varies from one deal to the other.
Mainvest is a crowdsourcing equity investment platform that has facilitated the settlement of over 450 deals consisting primarily of capital raises from small businesses and early-stage companies. According to the company, its goal is to deliver returns of 10% to 25% to investors with quarterly repayments and a minimum investment starting at just $100. Mainvest does not charge platform fees to investors.
Mainvest has developed a model in which valuations and payments are more predictable by estimating future distributions as a coefficient of the business’s sales. The rate of return earned by the investor varies depending on the amount of money put down as the percentage of “revenue-sharing” progressively fluctuates in the same direction as the capital invested. Read our full Mainvest review to learn more.
With over 600,000 investors being served, SeedInvest has grown to become a go-to source for founders seeking to raise capital for their firms and investors looking to participate in attractive opportunities in the early-stage business funding space.
This platform has been around since 2012 and is headquartered in New York. Thus far, over $400 million have been raised via SeedInvest as a result of its easy-going approach and competitive platform fees. Currently, SeedInvest charges a 2% fee per investment of up to $300, and the minimum investment is set at $500. The platform is open to both accredited and non-accredited investors.
Other Crowdfunding Equity Sites
Here is a brief overview of other equity crowdfunding sites worth exploring. Some of these platforms require investors to be accredited, so make sure you do your research before signing up or investing:
- AngelList Venture
Real Estate Crowdfunding
Next up, we will be discussing how crowdfunding investments work in one of the largest financial markets by asset value — the real estate market.
How Real Estate Crowdfunding Works
Real estate crowdfunding works by pooling money from a group of investors to acquire a real estate property so it can be flipped, repurposed, or administered more efficiently. Compared to equity crowdfunding, there are more diverse ways in which investors can participate in these kinds of opportunities in the real estate market.
This is an overview of the most common arrangements in real estate crowdfunding.
Equity real estate crowdfunding involves the acquisition of a property by a holding company whose capital comes from a group of investors. Every investor owns a portion of the property indirectly through the legal entity that has been incorporated, and they are entitled to receive a fraction of either the selling price if the property is flipped and sold or a portion of the income the property generates periodically.
Preferred equity refers to an arrangement in which the shareholder is entitled to receive a periodical dividend as compensation for his investment. These shares, however, do not have the same rights as common shares since preferred shareholders don’t typically get a saying on the holding company’s affairs and decisions.
In addition, they are not necessarily entitled to receive any gains resulting from an increase in the value of the underlying asset. That said, preferred equity holders typically have a higher claim in a scenario of bankruptcy than common shareholders.
Debt crowdfunding consists of the creation of a consortium of investors who are willing to lend money to a real estate project in exchange for the periodical payment of interest. The debt is collateralized by the property at hand, and investors have the highest claim in case the holding company — the recipient of the debt — is unable to fulfill its financial commitments.
Benefits of Real Estate Crowdfunding
- Investors can participate in the real estate market without having to commit a large sum to buying a property singlehandedly.
- Real estate properties can produce both capital gains (if the price of the asset increases over time) and income from the collection of rent payments.
- The underlying asset is tangible, and its value is typically easy to estimate.
Risks of Real Estate Crowdfunding
- The value of real estate properties fluctuates based on a large number of variables and investors must be familiar with the dynamics of the market to make sure the project’s financial prospects are accurate and attractive.
- Some real estate investments can be very illiquid.
- Not all real estate projects will end up generating the proceeds they were initially projected to.
Best Real Estate Crowdfunding Platforms
Fundrise is a low-cost real estate crowdfunding platform that allows both accredited and non-accredited investors to invest in this market with as little as $10. Investors can choose between five different plans depending on how much money they have available to invest, and they can choose among the ample portfolio of projects available within the platform to pick the most appealing ones.
Platform fees start at 0.15% per year, and the annual asset management fee is 0.85% resulting in 1% in fees paid every year for letting Fundrise manage your assets. Investors are typically compensated via periodical dividends coming out of the rent collected from the properties they invest in. In addition, they may be entitled to receive capital gains if the property is sold at a profit. Read our full Fundrise review to learn more.
Founded in 2015, EquityMultiple gives investors access to opportunities in the commercial real estate market with a minimum investment of $5,000. This platform is for accredited investors only, and fees start at 0.5% per year on the total amount of assets under management and can go up to 1.5% for certain projects.
Investors can choose which projects they would like to participate in, and they will pool their money together with that of other investors to reach the total amount of capital required. The rates of return reportedly go from 6% to 15% per year depending on the types of deals the investor opts to participate in (debt, equity, or preferred equity). Read our full EquityMultiple review to learn more.
This Portland-based company is another alternative through which investors can get exposure to investments in the commercial real estate market (CRE). The team at CrowdStreet carefully selects every investment that makes it into the portal to offer only the very best to those who have signed up with the platform.
The firm claims to have raised over $3 billion in capital for these real estate projects via the completion of over 600 different deals. The minimum investment to participate in most projects is $25,000, and fees start at 0.5% per year but can go up to 2.5% for certain types of deals. This platform is for accredited investors only. Read our full Crowdstreet review to learn more.
With as little as $10, investors can now participate in promising real estate projects by providing financing to entrepreneurs in this industry who are seeking to renovate, flip, or repurpose a certain property.
Groundfloor selects every opportunity pitched to its investor base very carefully and provides them with all the details they need to know so they can make an informed decision as to which are the projects that fit their investment criteria the best. To date, the firm claims to have produced average annual returns of 10.5%. The platform does not charge a fee to investors, and it is available to both accredited and non-accredited investors.
Other Real Estate Crowdfunding Sites
Here is a brief overview of other real estate crowdfunding platforms worth exploring. Similar to the equity crowdfunding sites, some of these platforms require investors to be accredited, so make sure you do your research before signing up or investing:
- Arrive Homes
Peer-to-Peer (P2P) Lending
Peer-to-peer (P2P) lending is a revolutionary activity that has been facilitated by the internet. It consists of removing the middle man when extending a loan by using an automated platform that can facilitate the arrangement between the two parties involved in the deal — the lender and the borrower.
How Peer-to-Peer Lending Works
Peer-to-peer lending consists of sourcing a loan for a prospective borrower by using funds from a group of investors. By spreading the amount of the loan between various parties, risks are diminished as lenders can build diversified portfolios made up of various loans. In theory, the gains earned from the best-performing loans should offset the losses incurred in the loans that have not been paid as expected.
Benefits of Peer to Peer Lending
- Peer-to-peer loans can be a great alternative asset as annual returns can go from 10% to 20% per year depending on the portfolio’s composition, risk, and overall credit conditions.
- Risks are relatively limited if the portfolio of loans is adequately diversified.
- Automated platforms typically deal with all the hassles of extending the loan and create the paper trail required to enforce the lender’s claim.
- The platform will provide information concerning the creditworthiness of the prospective borrower and riskier loans will typically be priced higher than those extended to individuals with a solid track record.
Risks of Peer-to-Peer Lending
- A poorly diversified portfolio of P2P loans can lead to large losses.
- If the economy goes into a recession, a large portion of the loans may go into default.
- Issues with the platform that acts as an intermediary for the loans can lead to severe losses in case the loan data gets distorted, lost, or modified.
Best Peer-to-Peer Lending Platforms
Peer-to-Peer crowdfunding sites come in different flavors and sizes; from fiat currency financing to cryptocurrency loans, there is something here for everyone.
Prosper is one of the most successful P2P lending platforms in the world, having facilitated over $20 billion in loans between nearly 1.3 million users. Prosper requires a minimum credit score of 640 from prospective borrowers and allows them to secure up to $40,000 at annual percentage rates (APR) ranging from 8% to 30% or higher.
Investors can use the platform to screen the kinds of loans that fit their risk tolerance, and they can pool their money alongside that of other investors to reduce the risk. The minimum investment is approximately $25, and platform fees range from 2% to 5%.
Investors may expect returns ranging from 5% to 20% per year depending on the types of loans selected and incorporated into the portfolio. Default rates vary depending on the overall quality of the loan portfolio.
MyConstant is a US-based peer-to-peer lending platform that, aside from traditional fiat financing, also supports crypto loans. According to the firm, the average interest rate earned on the platform stands at 7%.
Annual percentage yields vary from one type of loan to the other, ranging from 4% for traditional loans to 12.5% for crypto loans.
Every loan is backed by twice that amount and the minimum investment required to enroll in the platform is $10. The platform does not charge a fee for USD withdrawals and supports over 80 different crypto tokens at the moment.
Funding Circle specializes in P2P loans for businesses in the United Kingdom, enabling owners to secure financing for as much as $500,000 from a pool of investors. These loans are typically collateralized while several non-traditional financing alternatives are also available, such as merchant cash advances and factoring.
Interest rates start at around 4% for businesses, and credit periods go from 12 to 60 months. The company claims to have helped British businesses in securing nearly £14 billion in financing. For investors, the rate of return earned from a typical well-diversified portfolio of FC loans goes from 4% to 6% per year.
Specialty Crowdfunding Investments
Beyond real estate, equity, and P2P lending, there are other crowdfunding investment opportunities. These investments are typically risker than “traditional” crowdfunding investments. Here are some platforms that fall within this category:
Crowdfunding Investment Limits
In the United States, access to certain investment opportunities is limited to individuals that qualify as “accredited investors.” This distinction is created to protect the investment community from the offering of unregistered financial securities.
An accredited investor is one whose individual or joint net worth exceeds $1 million at the time the investment is made. On the other hand, it could also be a person or a couple whose income exceeds $200,000 and $300,000 respectively in the two most recent years.
Recently, the US Securities and Exchange Commission (SEC) also allowed individuals with a strong background and expertise in the financial industry or who have served in key roles in financial enterprises to be considered accredited investors.
Even though some crowdfunding opportunities are available to non-accredited investors, the majority of them are not.
There are also limits in regards to the amount that can be invested in a certain arrangement based on the investor’s net worth and income. For individuals with a net worth lower than $100,000 a year, the maximum investment permitted is 5% of that amount.
Meanwhile, for individuals with a higher net worth, the maximum amount permitted is 10% of the total. When it comes to income, the maximum amount permitted for people with an annual income of $100,000 or less is 5% and 10% for those who exceed that threshold.
FAQs: Crowdfunding Investments
The following are answers to a selection of the most frequently asked questions we get on the topic of crowdfunding investments.
Are Crowdfunding Investments a Good Investment?
Like any other investment, crowdfunding investments can’t be considered good or bad without first analyzing the investor’s risk tolerance, financial goals, income, and employment situation.
Overall, these opportunities can generate higher returns than traditional financial instruments such as stocks and bonds. However, they also carry a higher risk due to the way they are structured, their illiquidity, and the expertise required to analyze the prospects of the investment itself.
Are Crowdfunding Investments a Safe Investment?
Relative to traditional assets such as stocks, bonds, or buying real estate directly, crowdfunding investments are riskier. The reason for this is that they are considered unregistered securities, meaning that they are not regulated or have been screened and vetted by a financial regulator.
However, the platforms mentioned in this article are well-established businesses that have been providing these services for many years. In most cases, they have perfected their practices to ensure that investors’ money is well protected from fraudulent schemes.
How Are Crowdfunding Investments Taxed?
Gains from crowdfunding investments are taxable but the rate paid varies depending on how the earnings were produced. Real estate crowdfunding projects may generate periodical dividend payments that are typically taxed as regular income.
Meanwhile, if an investment was held for longer than a year and then sold at a profit or loss, the resulting gains or losses should be taxed at the applicable long-term capital gains rate.
Are Crowdfunding Investments Good for Beginners?
As a rule of thumb, crowdfunding investments are more complex schemes than traditional financial assets such as stocks and bonds. An investor who is not familiar with how the financial markets work or has zero expertise in the market they will be investing in (real estate, fine wine, art, etc.) may not be the best candidate to invest in crowdfunding investments.
Are Crowdfunding Investments a Liquid Investment?
Most crowdfunding investments are illiquid unless the underlying asset is very attractive to investors of all kinds. For example, selling shares in a real estate property owned by a consortium of investors may be harder than selling a stock of a publicly-traded company by using a broker-dealer.
That said, most of the platforms mentioned in this article have created secondary markets that have helped increase the liquidity of these investments.
Do I Need to Be an Accredited Investor to Invest in Crowdfunding Investments?
Not in all cases. Whether accreditation is needed or not will vary depending on the scope and reach of the investment opportunity. As a result of the 2012 JOBS Act, the SEC relaxed some of the provisions that prevented non-accredited investors to participate in certain details. However, some limitations still apply in specific cases.
Alternative assets such as crowdfunding investments are a great alternative to diversify a portfolio and boost returns. That said, investors should make sure that they understand the details of every investment opportunity to assess their merits and decide which one is a good fit based on their risk tolerance, financial goals, income, and other similar factors.
In summary, crowdfunding investments have made available opportunities that were previously restricted to high-net-worth individuals and investment funds. However, risks are also different in both nature and size, and investors should approach with caution and seek the counsel of a professional before committing a sizable portion of the portfolio to this asset class.
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Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and has also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.