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8 risks of equity crowdfunding

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Before you participate in equity crowdfunding, know and understand the risks associated with this kind of investment.

8 risks of equity crowdfunding

#1: High risk of loss

Most businesses that seek financing through crowdfunding are start-ups or early-stage businesses. Most start-ups and early-stage businesses fail. If you invest in a business that does not succeed, you will likely lose all the money you invested.

8 risks of equity crowdfunding

#2: Locked-in investment (liquidity risk)

There is a good chance that you won’t be able to resell your shares in the business you invested in until there is a change with the business – like if it goes public on a stock exchange – and this may never happen.

8 risks of equity crowdfunding

#3: Lack of information

You will receive some information (such as an offering document, annual financial statements, annual updates about how the money is being spent and notices about key events, like change in control of the business) but not as much information as you would receive from a public company.

8 risks of equity crowdfunding

#4: No income

Start-ups rarely pay dividends or interest while they are in their early stages. If you’re investing to generate income for yourself, a crowdfunding investment is not likely for you.

8 risks of equity crowdfunding

#5: Fewer protections – no approval and limited legal rights

These investments are not reviewed or approved by a securities regulator. You won’t have the same legal rights that you would if you purchased under a prospectus or through a stock exchange.

8 risks of equity crowdfunding

#6: No investment advice

Unless the crowdfunding portal is operated by a registered investment dealer or exempt market dealer, it won’t provide you with information about whether the investment is suitable for you as an investor.

8 risks of equity crowdfunding

#7: Potential for fraud

Despite checks made by funding portals, individuals with ill-intentions may not be completely weeded out from offering shares via crowdfunding.

8 risks of equity crowdfunding

#8: Dilution risk

Start-ups could issue new shares to generate more capital or to compensate employees. If you’re an existing shareholder your percentage ownership of the company decreases when additional shares are issued by the company.

8 risks of equity crowdfunding

Introducing Equity Crowdfunding: A Primer for Ontario Investors

Learn more about equity crowdfunding with our interactive guide.

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