Equity crowdfunding allows you to become a super supporter

Building a portfolio of high-quality start-ups is the only way to go to make real money investing in private companies. However, it is very seldom that individuals get the chance to invest in a potential unicorn straight after it starts. Access to early investment has normally been the reserve of wealthy, connected venture capitalists.

The other problem is that if you were offered an opportunity to invest in a start-up, the information-flow after investment was often sparse to non-existent unless you were also involved with the Board. Fortunately, with the advent of technology and changes in legislation this has all recently changed.

However, Regulation Crowdfunding is a legislated manner that allows ordinary investors to potentially benefit from opportunities to invest in early start-up businesses. The law was introduced in the US in 2016, originally limiting the amount that could be raised to $1,070,000 but this will increase from January 2021 to a maximum of $5,000,000 per annum.

There are still extremely strict protocols that must be followed including having a lead investor normally back the crowdfunding offer and disclosure of information to the Securities Exchange Commission (SEC) before any fundraising may begin. This includes disclosure on how funds intend to be used and all material risks.

Through Regulation Crowdfunding anyone is free to invest, not just wealthy accredited investors, so the start-up can raise capital from potential clients, friends, family, and local communities.

Only a U.S. entity can raise money using Regulation Crowdfunding, but U.S. Regulation Crowdfunding laws does not distinguish U.S. investors from non-U.S. investors. If a non-U.S. investor wants to invest in an offering, he or she is subject to the same investment limitations as U.S. investors with a maximum limit of between 5% to 10% of their income or net worth each year.

In addition, the start-up may advertise the offering in the press, on social media or by soliciting their customer list. Granted, the advertisements do have strict guidelines as to what may and may not be included.

The normal structure that crowdfunding investors invest in is a SAFE agreement. This agreement may be structured on a pre-money or a post-money cap rate, but very often when there is little or no revenue (very early-stage) the agreement could have no cap rate. This protects the early investor whose SAFE agreement will convert to equity either at the same rate as the lead investor, or at the slight discount to the series A funding round. 

To alleviate your risk, rather than putting all their eggs in one basket, investors should diversify capital in 10 or more companies. Sometimes the minimum investment into a company can be as low as $25, normally it is as low as around $100. So even with only $1,000 to invest, you can still diversify across 10 start-up businesses.

Growing a start-up from idea to exit is a long journey, so investing is really about backing the team to last the duration of the journey. Generally, the winners in a start-up investor’s portfolio can become twenty or thirty baggers over a five-to-seven-year period and these returns should more than make up for the losers.

The infographic shows how Equity Crowdfunding has changed and why it now makes sense for both entrepreneurs and investors. This is the reason that Knack has decided to start a WeFunder campaign as part of our initial capital raising efforts.

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