The practice of investing in upstream companies via the internet, known as equity crowdfunding, has been growing strongly both worldwide and in Brazil. But, as everything that is new is surrounded by doubts and distrust, the English mathematician, ex-Lloyds Bank and partner of the EqSeed platform (www.eqseed.com), for investment in startup companies in Brazil, Greg Kelly, prepared a list with 7 things everyone needs to know about equity crowdfunding.
1. Is equity crowdfunding legal?
Yes, it's cool. Currently, the activity is permitted by the Securities and Exchange Commission (CVM) under Instruction 400, which allows the public offering of securities by microenterprises (ME) and small companies (EPP). At this point, every offer has to go through a pre-notification process with the CVM before being published.
The CVM is already working to establish more specific regulation for this sector, which has been established for some time in countries such as the UK and the US. The Brazilian Equity Crowdfunding Association (EQUITY) has actively participated in this process. Within the next few months, the CVM intends to hold a public hearing with a forecast of publishing the regulation to be finalized in 2016.
2. What is the difference between traditional crowdfunding and equity crowdfunding?
Traditional crowdfunding: you put your money and, in exchange, you receive a product or a gift.
Equity crowdfunding: You invest your money and in return you receive a stake in the company and therefore the right to share in the company's future successes and profits.
3. How will I be remunerated as an investor?
With an equity crowdfunding investment, the goal is to sell your stake after it has multiplied in value. If in the future the company is bought by a larger company or goes public, you will be able to sell your share of the company, making a profit usually measured as a multiple of the amount invested. The company may also pay dividends.
From a social and market point of view, you, as an investor, make a company you believe in happen. It's your opportunity to participate in the creation of companies that can transform people's lives for the better and that will shape the economy of tomorrow.
4. What can go wrong? How much can I lose?
These possibilities of considerably high financial returns are possible only with high risks. When investing in startups, you run the risk of losing some or all of your invested money. Therefore, you should not invest money that you cannot afford to lose.
The keyword for this type of investment is diversification: a healthy portfolio is a diversified portfolio. These investments can make up a small part of a healthy portfolio, the part that aims for greater returns than traditional investments are able to deliver. The most important thing is to diversify your investments via equity crowdfunding between various companies and industries.
5. Are all equity crowdfunding platforms the same?
No, each platform works in a different way, offering very different terms and protections to the investor. Therefore, it is suggested that those interested in investing via equity crowdfunding get to know all the platforms and choose one with their profile. There are basic good startup investment practices that should be implemented to protect your investment. The preemptive right in future rounds, for example, is an essential condition that no professional investor gives up.
6. Is equity crowdfunding only for professional investors to participate?
With a minimum investment of R$1,000 per company, equity crowdfunding offers unprecedented access to investment in startups for every investor profile. However, it is essential that the investor understands that this type of application is very different from more common fixed income investments. As equity crowdfunding, instead of receiving an interest payment every month, the investor prefers that the company reinvest the profits in its own growth, because the objective is to accumulate and realize great financial returns in the long term. This strategy is necessarily accompanied by a low level of liquidity. You should only invest amounts that you will not need to withdraw in the short term.
7. I am convinced to invest via equity crowdfunding. But how to choose which startups to put my money in?
With equity crowdfunding, it is the privilege and responsibility of each investor to analyze and make their own decision about the quality of the company and investment. Certainty that a specific company will work you will never have. However, the platforms do everything possible to facilitate this decision process. The investor must consider the long-term potential of the market and the ability of the company's team to execute and deliver results for the duration of the investment. On the EqSeed platform, you can find all the information you need to get comfortable with your investment and you can even talk directly to the partners.
1. Is equity crowdfunding legal?
Yes, it's cool. Currently, the activity is permitted by the Securities and Exchange Commission (CVM) under Instruction 400, which allows the public offering of securities by microenterprises (ME) and small companies (EPP). At this point, every offer has to go through a pre-notification process with the CVM before being published.
The CVM is already working to establish more specific regulation for this sector, which has been established for some time in countries such as the UK and the US. The Brazilian Equity Crowdfunding Association (EQUITY) has actively participated in this process. Within the next few months, the CVM intends to hold a public hearing with a forecast of publishing the regulation to be finalized in 2016.
2. What is the difference between traditional crowdfunding and equity crowdfunding?
Traditional crowdfunding: you put your money and, in exchange, you receive a product or a gift.
Equity crowdfunding: You invest your money and in return you receive a stake in the company and therefore the right to share in the company's future successes and profits.
3. How will I be remunerated as an investor?
With an equity crowdfunding investment, the goal is to sell your stake after it has multiplied in value. If in the future the company is bought by a larger company or goes public, you will be able to sell your share of the company, making a profit usually measured as a multiple of the amount invested. The company may also pay dividends.
From a social and market point of view, you, as an investor, make a company you believe in happen. It's your opportunity to participate in the creation of companies that can transform people's lives for the better and that will shape the economy of tomorrow.
4. What can go wrong? How much can I lose?
These possibilities of considerably high financial returns are possible only with high risks. When investing in startups, you run the risk of losing some or all of your invested money. Therefore, you should not invest money that you cannot afford to lose.
The keyword for this type of investment is diversification: a healthy portfolio is a diversified portfolio. These investments can make up a small part of a healthy portfolio, the part that aims for greater returns than traditional investments are able to deliver. The most important thing is to diversify your investments via equity crowdfunding between various companies and industries.
5. Are all equity crowdfunding platforms the same?
No, each platform works in a different way, offering very different terms and protections to the investor. Therefore, it is suggested that those interested in investing via equity crowdfunding get to know all the platforms and choose one with their profile. There are basic good startup investment practices that should be implemented to protect your investment. The preemptive right in future rounds, for example, is an essential condition that no professional investor gives up.
6. Is equity crowdfunding only for professional investors to participate?
With a minimum investment of R$1,000 per company, equity crowdfunding offers unprecedented access to investment in startups for every investor profile. However, it is essential that the investor understands that this type of application is very different from more common fixed income investments. As equity crowdfunding, instead of receiving an interest payment every month, the investor prefers that the company reinvest the profits in its own growth, because the objective is to accumulate and realize great financial returns in the long term. This strategy is necessarily accompanied by a low level of liquidity. You should only invest amounts that you will not need to withdraw in the short term.
7. I am convinced to invest via equity crowdfunding. But how to choose which startups to put my money in?
With equity crowdfunding, it is the privilege and responsibility of each investor to analyze and make their own decision about the quality of the company and investment. Certainty that a specific company will work you will never have. However, the platforms do everything possible to facilitate this decision process. The investor must consider the long-term potential of the market and the ability of the company's team to execute and deliver results for the duration of the investment. On the EqSeed platform, you can find all the information you need to get comfortable with your investment and you can even talk directly to the partners.
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