In many ways, the Internet has been society’s great equalizer, allowing the average person access to knowledge and opportunities that, for much of recorded history, weren’t available to the masses. Crowdfunding, in the sense of being an investment opportunity, offers an excellent example of that equalizing action. That’s because the crowdfunding investment field is open not just to accredited, wealthy investors, but also to those working with a lot less money. That type of opportunity offers a chance for financial growth over time, the sort of growth that can act as a bridge to the next level of financial achievement and security.
The Other Side Of The Coin
Crowdfunding is a term that is working its way into the mainstream of modern language. Most Internet users are familiar with the term in the sense of raising money, whether it be for charity or for a particular creative project or invention. Even people who don’t use the Internet are becoming familiar with the term as crowdfunded charitable acts and projects make headlines in mainstream news with increasing frequency. Such news stories tend to focus on the recipients of crowdfunding, the people or projects benefiting from the money that is raised.
However, there is another side to the crowdfunding coin – those putting up the money. It is on that side of the funding equation that investment opportunities lie. Crowdfunding is an international phenomenon, increasingly playing a vital role in small and micro business development in emerging economies. While investment regulations do vary from nation to nation, for the most part crowdfunding platforms have room for the small investor as well as for the large investor.
The Beginning Of The End For Exclusion
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With the 2012 Jumpstart Our Business Startups Act (JOBS Act), the United States loosened regulations limiting these sorts of investments to accredited investors with significant financial holdings, opening up a wealth of opportunity to Americans in the 99 percent. This is a major change from the regulations that have been in effect for over 80 years, restricting certain types of investments to the wealthiest of the nation, referred to as accredited investors.
As defined by the Securities and Exchange Commission (SEC), to be an accredited investor, one must earn at least $200,000 per year or $300,000 annually as a couple or have a net worth of more than $1 million. These restrictive regulations were supposedly put into place to prevent the sort of investor losses experienced at the start of the Great Depression, when the government decided that people should only be allowed to make certain types of investments if they could demonstrate that they could afford to lose the money. Peer-to-peer lending and crowdfunding have been a powerful force in pushing governments to reconsider those antiquated regulations.
Inclusion Comes With Responsibilities
As the walls of exclusion crumble, it’s important to remember that with inclusion comes responsibilities. It is the responsibility of an investor to be knowledgeable about what he or she is doing with his or her money. For the inexperienced investor, the first investment should be in education, perhaps even formal classes at a local community college or a certified financial education program. Due diligence is essential with each investment. Don’t invest money that you cannot afford to lose.
Become A Lender
Peer-to-peer lending has become a powerfully disruptive force in the world of traditional banking. The concept is simple, people making loans to other people, facilitated by cutting edge financial technologies. Peer-to-peer lending groups provide a broad range of loans, including loans to micro-businesses, small businesses and to borrowers seeking to pay off higher interest credit card debt, for varying amounts and interest rates. Loans are graded for risk, with higher risk loans offering higher investment returns to the lenders via higher interest rates.
As the concept and its associated technologies have matured, lender strategies have been adopted by peer-to-peer lending groups to help mitigate potential losses for lenders. One such strategy is breaking loans into smaller pieces, spreading them across multiple lenders, reducing individual lender exposure to a single loan. Lending Club, for example, allows lenders to fund loans in $25 increments.
Peer-to-peer lending groups can differ on specifics, such as minimum investment or account balances required, term of loan and timing of return distribution. While you may find investment opportunities requiring less or more, in general, $2,000 to $5,000 is enough to get you started. Something new in the peer-to-peer/crowd-funding loan market is the ability to participate in lending within the real estate market, made possible in the United States by the SEC and its amended Regulation A.
Groundfloor is one of the real estate focused groups with investments open to non-accredited investors. This group’s pilot program was a success, with no defaults on the $2 million in commercial real estate project loans it made during that initial period. The average loan was for between $50,000 and $100,000 with a term of 6 to 12 months. The average annualized yield for these loans was just over 12 percent.
Make Equity Investments
With equity investments, investors receive shares in the business for their money. As the business grows in value, so also do the shares. However, there is risk involved, particularly when investing in start-ups because they do fail sometimes and when they do, investors lose. This is one of the areas of investing that the average American, until very recently, was prohibited by law from participating in. This type of investment opportunity, which can be quite lucrative when it comes to returns, was limited to these deemed able to withstand potential losses.
Many other nations don’t have such tight regulation, allowing for a quite brisk equity investment market open to a wide variety of investors. This is especially true in developing nations and emerging markets. This type of investment is a vital factor in the growth of small business in Asia, Africa and India, small businesses that are lifting individuals, families and even whole villages out of poverty.
Title III and IV of the JOBS Act of 2012 have not yet been fully implemented by the SEC. The agency is still wrangling over the fine print details of the new guidelines it will be issuing. So, while there are currently equity investment opportunities for non-accredited investors, such as those offered through MicroVentures, those types of opportunities can be expected to expand greatly in the near future.
Work Toward Growth
If you’re hoping to see your investment fund and your capital grow, then invest with a plan and live by a budget. Choose your investments wisely, bearing in mind that higher returns are often associated with higher risk. Don’t be drawn in by high yield investment hype. Investment scams are not at all uncommon and are designed to prey on those lacking financial or investment knowledge. Whenever you are promised high returns on your investment, make no decisions until you have independently identified and considered the risks involved. Don’t expect the person or investment group trying to sell you on a particular investment to fill you in on its potential pitfalls.
When you do begin to see returns on your investments, split that yield in half, placing some in savings to bolster your capital and keep some in your investment account to increase your investing and earning capacity. Using this strategy, you can experience a steady, gradual growth. A conservative approach is the best bet for a beginner serious about long-term financial growth. Leave higher yield, riskier investment for when you have the experience and education required to better assess the probability of success and a better financial cushion to absorb the inevitable occasional financial loss.
Change The Future
Despite Wall Street’s efforts to muscle in and take things over, crowdfunding and peer-to-peer lending are truly of the people. Sidestepping the traditional financial industries and their exclusionary practices, these crowd-based, peer-oriented loan and investment platforms are already changing the future, as demonstrated by such major legislative changes as the 2012 JOBS Act. Now, the future holds more than just the rich getting richer. It also holds the potential for the average person to take advantage of the same financial growth opportunities the wealthy have always had at their disposal and to pull themselves up the economic ladder, rung by rung.
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