7 steps to take before investing in a crowdfund deal

When I began investing 20 years ago, art, private real estate deals and other investments requiring multiple millions of dollars were largely off-limits. They simply required too much capital for an everyday investor like me to participate in. That has since changed due to a type of investing known as crowdfunding. As a crowdfunding investor for several years, I’ve spent hundreds of hours researching crowdfunding trends, platforms and deals. While there are benefits to crowdfunding investing, these deals also carry their share of risks. 

No investing comes with guarantees, but here are 7 steps to take before investing in a crowdfunding deal to improve your outcomes. 

Crowdfunding pools smaller amounts of money from individuals to invest via web platforms. Investment minimums can vary depending on the platform, but some let you invest for as little as $10. Often the investor will receive shares reflecting partial ownership of the crowdfund. The fund then invests in one or many investments according to the fund’s investment objective.    

Popular crowdfunding investments

•  Real estate

You can invest in real estate in equity and debt deals without the hassles of owning and managing properties. Sites like EquityMultiple and Crowdstreet require you to be an accredited investor with minimum investments of $5,000-plus. Others, such as Fundrise, Groundfloor and RealtyMogul, allow anyone to invest for as little as $10.

• Start-up and venture capital

You can invest in start-up businesses now due to Regulation Crowdfunding (Reg CF) in the Jumpstart Our Business Startups (JOBS) Act of 2012. Typically, in return for shares in the company, an investor can become a partial owner in a start-up or private business.  Debt lending is available as well. Sites such as Republic, Wefunder, SeedInvest and  StartEngine are examples of portals for these deals.

• Art and collectibles

You can invest in a fund that purchases artwork or collectibles such as wine, comic books and trading cards. The asset is held physically by the administrator until its sale down the road at a targeted increase in value. Masterworks is a site that offers crowdfunding investing in art, and StartEngine has collectibles offerings.

Crowdfunded asset classes — such as art, real estate and start-ups — can be considered speculative and are not as regulated as investing in stocks on exchanges.  Limit the amount of money you set aside per deal and for crowdfunding in general. Particularly for start-up businesses, where over two-thirds fail, the SEC limits individuals who make less than $124,000 a year to investing no more than 5% of income or net worth in start-up businesses. This review reflects the risk involved: 

Unlike stocks and bonds, most crowdfunded investments have no secondary markets where you can sell your shares to another investor. You buy and hold until the underlying assets sell. And it takes years for real estate to be built, art to appreciate and businesses to grow. The offering document on a crowdfunded investment will estimate the holding period, typically 3–10 years. Don’t expect to get your money back before this time, and allow that it may take longer than anticipated. 

If you prefer or need quick access to your money, you may want to stick to investing in stocks and bonds that trade on secondary markets. You can do that yourself on discount broker platforms — like Charles Schwab or TD Ameritrade — or with the help of investment advisors or robo-advisors. 

Read our story on financial advisors vs. robo-advisors if this interests you, and find reviews in Money & Insurance.

You want to own various assets across different asset classes, so crowdfunding investments should make up a piece of your investing pie. Check out A Beginner’s Guide to Smart Investing to learn more about the benefits of diversification. If you would like some professional help with adding diversification to your investments, financial planners offer this assistance.  

Take it further and target owning a mix of crowdfunding investments eventually. Some crowdfund deals, as noted by this reviewer, offer purchases of multiple properties within one investment.  

Thoroughly research the investing platform, along with a few others. Much like when you choose a bank, get a feel for the platforms and that your money is safe. Look for a good track record, that the firm is properly regulated and has decent customer ratings. You want to be confident that the site has staying power and that you are avoiding an investment scam. Read reviews to get a feel for the customer service available.  Seasoned investors are often willing to share their experiences: 

When you apply for a loan at a bank or neobank, they vet what’s on your credit report and judge your ability to repay a loan. Put a similar eye toward the investment managers you’re entrusting your money to. These professionals will attempt to build the hotel, purchase the art or otherwise try to make you money on your crowdfunded investment accordingly. Do they have a track record of success and experience in the relevant sector? Be confident that they will perform on their vision or move on. Reading reviews from other investors can shed light here.

Given that you can’t rely on analysts or highly regulated public documents like you can with stocks and bonds, you will want to read through all marketing materials and the following documents: 

• Offering memorandum: Also known as a private placement memorandum (PPM), this document is used to attract investors and details the targeted investments, the terms of the deal and the management involved in executing the investment.    

• Subscription agreement: This is the investor’s application to join the investment. This contract is a two-way agreement about how much money you will invest, the services that the management will provide and the way investment returns will be paid out. 

It was a task for me at first, but I quickly moved up the learning curve and was able to breeze through the documents after reading through a couple of different deals. 

Understand the risks involved in the business, the potential returns and the timeline for the business. Make sure the investment terms are clear and they have a clear investment thesis that you agree with. For example, do you agree if the manager believes building single-family homes in Sunbelt states will generate higher returns? Make sure you are aligned. If you don’t understand the investment, move on. 

Typically, there are fees at the crowdfunding platform level and at the investment manager level. Are the fees transparent? You do not want to be caught off guard like this reviewer: 

Are they on par with other managers and platforms in the space? And are they appropriate for the level of service you desire? Some sites are merely pass-through vehicles that set you up with a manager. Other sites will aggregate quarterly investor reports and tax documents for you and let you manage your money through an app. Customer reviews regarding fees from existing investors can assist here.      

These best practices, along with reviews and recommendations from other crowdfund investors, can better position you to crowdfund and navigate a space with less regulation and liquidity but with added diversification and returns potential. 

And feel free to leave your own reviews. Not only are you helping fellow investors, but you also never know who is reading and may respond to your investor needs. 

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