Interested In Crowdfunding? Learn More About This Exciting Alternative Investment
It’s 2022. We’ve recently been through a global pandemic, a great resignation, a supply chain shortage, and we are currently on the brink of a recession.
While we’ve certainly experienced difficult times, we also have exciting and unique opportunities all around us. People are working anywhere they want, boldly asking for raises, starting new business ventures, and investing in atypical investments.
One thing that ties ambitious entrepreneurs to savvy investors is crowdfunding. Whether you are an entrepreneur with an exciting idea or an investor who wants more investment opportunities within their IRA, crowdfunding may be just the answer.
Basics of Crowdfunding
Crowdfunding pools money from multiple investors - usually via an online platform - to raise capital for individuals, companies, or charities. In 2020, crowdfunding raised about $114 billion worldwide. Crowdfunding investments can involve real estate, small businesses, private equity, and more.
Title III of the JOBS Act - passed in 2012 - specifically refers to the restrictions and regulations of crowdfunding. Before 2015, only accredited investors - those with more than $1 million in assets or those consistently earning more than $200,000 per year - could invest in equity crowdfunding. Now, the “everyday investor” can have a piece of the crowdfunding pie.
There are four types of crowdfunding:
Donation: Donors give money and do not receive anything in return - this is common among online or local communities. For example, if a prominent community member gets into a horrible accident, people may donate to their medical bills through a crowdfunding donation platform.
Rewards: Donors receive products, services, or discounts in exchange for their contribution. This may be as little as a T-shirt or as big as a free product that the company raised capital for. Reward crowdfunding is similar to donation crowdfunding because what the donor is getting in return is often much less valuable than the capital they gave.
Debt: Donors receive their capital back with interest - this is a type of peer-to-peer lending and there are loan terms and deadlines involved. This type of crowdfunding is for investors interested in making a return.
Equity: Donors receive shares of the business venture in exchange for their money. This is another type of investment - investors can get in on the ground level and help a business get started or grow.
Benefits of Crowdfunding
Depending on whether you're an entrepreneur or an investor, there are unique benefits that come from crowdfunding.
Benefits of Crowdfunding For Entrepreneurs
Gathering the capital needed to start a new project is not easy. Banks and venture capitalists can demand an entrepreneur jump through many hoops before they hand over the money.
With crowdfunding, entrepreneurs can pitch their business idea or new product to a large group of people, ask for a small amount of money from each person, and get the cash needed to launch. It’s also a very low-risk endeavor. If a business doesn’t reach its crowdfunding goal, it can simply return the capital to investors without fees or penalties.
Crowdfunding also provides the perfect opportunity for market research. If an idea does not gain interest or attention, it might need tweaking - or a complete overhaul - to succeed. A successful crowdfunded venture may also create instant customers since these investors now have a vested interest in the success of the business or product.
Benefits of Crowdfunding For Investors
Crowdfunding can be great for the investor because it has the potential to be an income-producing asset and a growth asset. Investors can earn interest through debt crowdfunding or increase their investment share value through equity crowdfunding.
There are many projects, products, and businesses that are crowdfunded. The investment possibilities are as big as your imagination. You can personalize your investment and back businesses that interest and excite you. Crowdfunding also helps diversify your portfolio because it’s not linked to the financial markets and you can choose non-correlated assets.
Crowdfunding can also provide non-accredited investors or investors with a small amount of capital to invest in stable assets such as real estate. If a younger or beginning investor doesn’t have the cash to buy an investment property yet, their portfolio can get exposure to real estate via real estate crowdfunding platforms.
Crowdfunding can also offer above-average returns and more transparency than traditional investments, such as mutual funds.
Considerations for Crowdfunding Investments
As with any investment, crowdfunding carries associated risks. Return on investment is never guaranteed - a crowdfunded business may not succeed and the investor could be left with equity in a failed company.
Crowdfunding is also not for short-term investments - funds are illiquid for a period of time, potentially years. So while they are a great choice for your Individual Retirement Account (IRA), don’t look to crowdfunding for a quick return. Businesses take time to launch, products are often tweaked and changed, and real estate returns are typically realized over five-plus years.
This method of investing also requires you to do some homework. You’ll need to carefully analyze the platform, business, product, etc. before investing your money. Be sure to also check for credibility and understand any associated fees.
Crowdfunding With A Self-Directed IRA
If crowdfunding excites you and you want to start diversifying your retirement portfolio with this alternative asset, the best method is to use a self-directed IRA. Unlike traditional retirement accounts, self-directed IRAs provide you with the freedom to invest in assets outside of traditional mutual funds, stocks, etc.
Using a self-directed IRA for your crowdfunding investments versus using a traditional method can bring significant tax savings. If you choose wisely and fund a project that produces a return, you won’t have to pay capital gains tax on it because your profit is staying within your IRA.
There are considerations to be made. You cannot receive any benefit from the crowdfunded investment before you hit retirement. A prize or reward can equate to monetary value, so it’s best to refuse those offerings to prevent triggering a prohibited transaction.
A knowledgeable custodian can help you invest in crowdfunding while avoiding prohibited transitions which can cause you to pay hefty IRS penalties and put you at risk of losing IRA privileges.
Diversify Your IRA With Chicago Trust Administration Services
Getting started with Chicago Trust Administration Services is very simple. We start with a discovery call where we’ll hear the investments you’re interested in engaging in and what you hope to achieve with your self-directed IRA. Then we’ll move on to goal setting and discussing your plans. After hearing your priorities and goals, we’ll provide you with our recommendations and strategy.
Then it’s time to start investing! We act on behalf of your self-directed IRA and acquire the assets within your account. From the initial paperwork to the annual compliance forms, we ensure you’re staying compliant with the IRS and avoiding prohibited transactions. Our professional relationship continues with ongoing support and open conversations.
If you’re interested in a self-directed IRA or adding crowdfunding to your retirement investment portfolio, we’re a quick call away. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
___________________________________________________________________________
*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.