Crowdfunding: Five basic tips for investors

Last October the Securities and Exchange Commission (SEC) agreed rules rules to implement Title III of the Jumpstart our Business Start-ups (JOBS) Act, bringing non-accredited investors into the fold for equity crowdfunding in the US.

The new rules come into effect from Monday May 16. They set the stage for equity crowdfunding in the US to continue its exponential growth over the next few years, on top of the existing market for accredited investors.

Many questions remain and a steep learning curve is inevitable for both investors and entrepreneurs. Under the new guidelines anyone can participate in equity crowdfunding instead of just accredited investors who meet sufficient levels of wealth. Now anyone can become a start-up investor.

Innovation Economy Corporation, aka ieCrowd , which was set up in 2010 with a mission of bringing the world together to unlock the potential of untapped innovations, will launch its own Title III raise shortly. It currently has two products coming to market: Kite natural mosquito repellant that blocks mosquito CO2 receptors from detecting human blood and the Nuuma air pollution sensor to create a digital nose in smartphones.

What to look for

On May 16 and beyond, a large number of start-up companies are going to try to raise money using equity crowdfunding. Having been in this business for several years now, we can offer the following attributes the everyday investor should look for as they choose a company to fund.

1. Already raised capital. Most of these companies are going to be raising money for the first time. If you can find one that has already been in business for a while and raised capital, you can rest assured they have already learned some of the hard lessons of starting a business.
2. Has a board of directors. Typically most start-ups begin as a one or two person show. Single entrepreneurs can have a one track mind and it isn’t always moving in the right direction. Companies with a solid board of directors can demonstrate that professionals have done their due diligence and are on board to help with strategic direction.
3. Knows how to deal with investors. There is going to be a steep learning curve with equity crowdfunding, both for entrepreneurs and investors. Any company that already has investors knows how to keep them informed and meet their expectations.
4. Diversifies its offerings. Investors can diversify by investing in several different companies, or by investing in one company that has products and interests in several different markets. Initially the risk for equity crowdfunding is fairly high but the best bet for success is diversification.
5. Has an exit plan. A start-up that already has plans for an initial public offering (IPO) or a purchase has more potential for a successful exit where everyone makes money.

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