Equity crowdfunding is still in its infancy. As recently as three years ago, very few people talked about it. It was just a concept, as JOBS Act (Title III, for example, was just passed) and similar regulations elsewhere in the world did not exist yet. We are probably going to see the best of it from 2016 on.
As with every new industry, people take some time to adjust, adapt, and learn the best way to leverage on public attention. This leads to the buildup of many errors, failures, and myths. It’s time to debunk some of them.
Myth 1: equity crowdfunding is always risky
It’s a common belief that equity crowdfunding is a risky business. And we are not just talking about the startup risk. We are talking about adventurous people.
The main reason behind this misconception is the perception that crowdfunding entrepreneurs are normally the types who were turned down by VCs and banks, penniless people who throw an idea to the crowd and see if it catches. Then, they use other people’s money to try something that is not feasible, perhaps even outright defrauding their backers.
While that holds true for some projects, there are several points that do not make it true as a whole:
- Equity crowdfunding is not just about financing moonshot startups. There are serious, well-planned real estate projects that have the lowest of risks. They are normally backed by a serious company with a proven track record of good projects and performance.
- Most projects are local — even startup equity crowdfunding projects are mostly local, focused in one state or city. That means backers can meet the founders, and can check their claims and see if they can fulfill their promises. That reduces the chances of fraud and failure dramatically.
- Startups have the alternative of traditional rewards-based crowdfunding, so their pitch is directed to investors, not to people who want to donate to a company that will make the world a better place. As such, most products and services are more traditional, and their market is more predictable. While that is not the best situation for huge gains, there is less risk in more traditional investments.