Do you remember the tin passed around at your local church to collect funds for a new library wing or a youth outreach program? Everybody put in some money in the tin, and in the end, it became a sizeable amount.
The collection is the simplest way to explain crowdfunding. As the name implies, it is a method of collecting funds by reaching out to a large number of people for small amounts of money. Typically, people reach potential investors through the internet on various crowdfunding platforms or even on social media platforms.
People may invest $10 or $15 in your crowdfunding project if they think it’s worthwhile. It can be a new business venture, medical treatment, or a new social project. In return, the investors don’t ask for anything except a thank you.
Types of crowdfunding
There are four basic types of crowdfunding, which include:
Besides the other types, people are more concerned about investment crowdfunding. Let us learn what it is about:
If we dive into the world of investing, we can see crowdfunding as the most recent form of investment. This investment opportunity opens new ways of collecting seed money for emerging businesses. The word “crowd” in crowdfunding refers to the businesses or people that will provide money. Hundreds of investors are enjoying this lucrative opportunity in the form of rewards, shares, and profits. However, it comes along with a chain of risks. Therefore, evaluating the situation is mandatory before investment.
Risks of crowdfunding
Before you invest in crowdfunding, you should have a clear knowledge regarding the risks associated with it. Some of these risks include:
- You may be at risk for hacking if you transfer funds online.
- There is a risk of fraud from the crowdfunding website. They may steal your information or money for nefarious purposes.
- The crowdfunding sites might be conning you into investing for illegal purposes such as drug trafficking or laundering money, etc.
- Since most new business startups fail in their initial years, there is a high chance that the business might fail.
- Rise in the value of shares is not guaranteed. So, you might not get any dividend.
- Shares are not easy to sell. It is because most of them are not listed. In comparison to these shares, shares of big companies are easy to sell.
- The crowdfunding website may stop their business at any time. The website might stop functioning before your fund is being invested in the business.
How to reduce risks?
Although it sounds appealing, there are some caveats. The threat of security concerns always shadows finance and online payments. Therefore, you must be careful when choosing to crowdfund; here are a few things to consider:
The SSL – Secure Sockets Layer technology ensures that your data is private and fully encrypted. Before donating any funds, be sure that the website provides this technology. When you enter your private details, such as your credit card information, you should notice a lock icon. This icon is located at the top right corner of the web address. If it is present, you can safely enter your information.
PCI compliance Level 1
In any online platform where sensitive information like debit and credit card details are required, PCI compliance is mandatory. Thus, you need to ensure that the site is certified with level 1 of PCI compliance before entering your financial details.
Why Level 1
Level 1 of PCI compliance is allotted only after a third-party auditor ensures the site’s safety and security.
Trust and safety teams
Always check if the website has a separate department for safety. This department works solely to ensure the cybersecurity of investors. It regularly updates the website with the latest security technology and takes prompt action for breaches. The team focuses on specialized skills for providing a safe network. It works closely with the law enforcement agencies, FBI, and resolves all financial issues. Since people are highly concerned with safety and security, some websites provide guidelines for verification. This department designs these guidelines, and they are meant to make the donor comfortable.
Ensure that refund policy are available in case of misuse. This approach proves that the website is reliable. Fraud and misleading websites never design a refund policy. This policy states that if the fund is misused, the donor can file for a refund. These policies are created to provide a safe experience for the people. Though funds are mostly used for the right cause, such policies make the process more transparent.
Connection with beneficiary
One of the biggest concerns about crowdfunding is that funds might fall into the wrong hands or may be used for the wrong purpose. To dispel any such doubts, some websites directly connect the donor with the person receiving the funds. Thus, you know who and where your funds are going are.
For example, you may want to donate money to a single mom who is collecting funds to purchase a carpet cleaning business franchise. To make sure that this is a real woman and that your funds are going to the right person, you can ask the crowdfunding website to put you in touch with the person requesting funds. Some websites also provide the option of adding the beneficiary directly. Also, check if the website displays the beneficiary name or not.
Consider SAFE Security
Most websites offer The Simple Agreement for Future Equity to ensure investor safety. SAFE is an agreement that ensures that the business in which you are investing is bound to give you equity in the future if profits occur. This agreement takes place between the investor and the business.
Some people are confused with SAFE and consider it the same as common equity. Unlike the traditional equity that you get in common shares of any company, in which the equity is given immediately, SAFE gives you equity in the future. Besides this, it will only give equity if the investor chooses to receive or trigger it.
Now, you should know the conditions that trigger SAFE. Look at the basic offering of the company and predict its future position. It might also happen that the company is merged in the future with other companies. However, note that in some cases, SAFE never turns into equity. In this scenario, you neither gets any profit nor the initial investment.
In short, crowdfunding is helping millions of people globally, but we should know the essential factors to be considered before relying on any crowdfunding site. Checking the safety teams, verification guidelines, PCI compliance, SSL technology, and no return scenarios are a few ways to decide if crowdfunding is safe for you.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
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