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.
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.
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.
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.
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.
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.
Despite checks made by funding portals, individuals with ill-intentions may not be completely weeded out from offering shares via crowdfunding.
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.
Learn more about equity crowdfunding with our interactive guide.