This article was written by Jeff Annison. Jeff is the co-founder and president of Legion M, the worlds first fan-owned entertainment company.
Every savvy investor understands the relationship between risk and reward. Bonds are safe but stocks are sexy. IPOs have home-run potential; blue-chips ensure you won’t strike out.
Thanks to new rules enabled by the JOBS Act, the game is about to change. If the stock market is the world’s biggest casino, the SEC just introduced a new table.
It’s called equity crowdfunding, and in fact it’s really not new–it’s just new to you. The wealthy have been doing it for years.
At its core, equity crowdfunding is about allowing the general public to participate in early stage financing, a domain that for the last 80 years has been the exclusive purview of venture capitalists and high-net-worth individuals.
Let’s say your neighbor is a Mark-Zuckerberg-type with a new startup cooking in his garage. It’s a great idea, but he needs money to buy servers. You’ve got a little cash you’d be willing to risk on a swing for the fences. After all, this might be your chance to get in on the ground floor of the next big thing, right?
Wrong. Prior to the JOBS Act, more than 90% of the population would be forbidden from investing in an early stage venture like this. Unless you had a net worth north of $1 million (not counting your home) or an annual salary of more than $200K, you would be excluded from investing, no matter how badly you wanted in. Instead, you would have to wait until all the seed stage investors got in (with potential for a 1,000X return), the early stage investors (100x return), the late stage investors (10x return) and the company went public (with healthy cut to investment banks, of course). Finally you get the chance to buy in—at a $100 billion valuation.
A cynic would say the game is rigged. The system clearly favors the wealthy elite with access to opportunities not available to the general public. After all, there is no litmus for intelligence, education, or understanding that determines who can invest—only personal wealth. Wall Street wins, Main Street loses.
HotForex extends partnership with Paris Saint-GermainGo to article >>
Others argue the system protects you. After all, the example above is great when your neighbor really is the next Mark Zuckerberg, but what if he only thinks he is? Aren’t venture capitalists and high net worth individuals better suited to sort the visionaries from the wannabees? Aren’t they better equipped to survive the losses?
Ultimately, it doesn’t matter which side of this argument you are on. The point is moot, the JOBS Act is here. All that matters is what you do with this new capability.
early stage investing is, by nature, about long shots
What’s critical to understand is that early stage investing is an extreme illustration of risk vs. reward. If you are fortunate enough to get in on the ground floor of the next big thing, there is the potential for staggering returns. But early stage investing is, by nature, about long shots. The vast majority of startups fail, and when they go down they usually take all the investment capital with them.
Our advice to anyone considering investing in an early stage startup is to imagine losing ALL your investment. If that thought is too much to bear, don’t write the check.
But if you can bear the risk, why shouldn’t you be able to swing for the fences? After all, the old laws date back to a time when people had access to less information in their lifetime than we have on our smartphones.
At the end of the day, the JOBS Act is about freedom. There’s nothing stopping ordinary Americans from “investing” money in Las Vegas, lottery tickets, or TV evangelists. Now there’s nothing stopping us from investing in early stage startups.
We think it’s an idea long overdue—after all is there anything more noble than investing in the people, ideas and companies that invent our future? At the very least you’ll have the satisfaction of creating a job for an entrepreneur. And if you get lucky, you might just be in for the ride of your life!