Crowdfunding is Becoming the Top Financial Resource

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Crowdfunding participation has increased every year that it has been available to the general public. With equity crowdfunding rules coming into place in some of the world’s leading economies, the future growth between now and 2020 looks to be explosive. In 2014, global capital raised through crowdfunding topped $16 billion. The number of crowdfunding platforms has grown at phenomenal rates around the world.

There have already been numerous successes. Oculus was sold for $2 billion after 10,000+ backers got it off the ground with $2.5 million. Oculus is a reflection of the future crowdfunding problem we may be beginning to see. Low investment totals mean low returns for backers. For Oculus, the rewards granted were the investment. The backers didn’t get a piece of the $2 billion pie. They got what they paid for instead.

Equity crowdfunding could provide the same unpleasant surprises.

What Could You Do With $2,000 in Crowdfunding?

Let’s say that non-accredited backers are given permission to get involved with equity crowdfunding. For argument’s sake, let’s say their income is capped at $2,000 for investments. A good return on an investment would be about 10%. Here’s the problem: 10% on $2,000 is just $200.

In return, the non-accredited backer is taking on a lot of risk. They may be stuck with their investment for a minimum of 1 year. They may not be able to exit out of the investment for up to 10 years. A 10% gain on that $2,000 might be $2,200 on exit, but after 10 years, that equates to a 1% gain of exactly $20. That might not even beat inflation.

Are Expectations Unreasonably High?

The issue is that backer expectations and what will really be happening seem like they’ll be worlds apart. Tax advantaged investing could provide a better overall return, especially in a Roth IRA. Backers are looking at crowdfunding equity as if it were a day trading arrangement, but that’s not what it is going to be.

When reality sets in, many backers may just discover that crowdfunding isn’t the right path for their money to be on.

With proper structuring and informative rules, better expectations may make crowdfunding a viable option for the non-accredited backer. If that doesn’t happen, a $20 annual gain might not be tempting enough to bring backers to future startups.