• Stock Strategies
  • Crowdfund Investing: An Exciting New Alternative for Individual Investors

    by Louis C. Gerken and Thomas C. Gray

    Indexing and thoughtful asset allocation are solid choices for most individual investors’ core holdings. But for those seeking exceptional gains on a long-term investment horizon, alternative investments like private equity—including venture capital—can offer an uncorrelated, value-based, and often highly lucrative, complement to the otherwise staid 60% stock/40% bond investment plan.

    Historically, only high-net-worth individuals and institutional investors, including pension funds and university endowments, have been able to enjoy the 600+ basis points of annual incremental return that private equity and venture capital investments deliver long-term over traditional asset classes (exchanged-listed stocks and bonds). Meanwhile, an estimated $5 trillion in U.S. individual retirement and personal investing accounts has been restricted to those traditional asset classes. Now, Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act is poised to change the game by allowing unaccredited investors to participate directly in equity-based crowdfund investing.

    Crowdfunding, the pooling of capital from many individuals to financially back a cause, project or company, started mostly as a way for individuals to conveniently support social causes and artistic projects by donating online (commonly referred to as donation-based or reward-based crowdfunding). However, crowdfunding has evolved rapidly into what may well become a viable investment vehicle that connects investors in search of portfolio diversity and higher returns with entrepreneurs and small-to-mid-size enterprises (SMEs) in search of capital to develop their ideas and expand their businesses. Figure 1 shows the tremendous growth of crowdfunding in recent years, including the accelerating growth of crowdfunding capital raised with the hope of financial returns (commonly referred to as crowdfund investing).

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    Louis C. Gerken is the founder of San Francisco Bay Area–based Gerken Capital Associates (GCA), an independent alternative asset fund manager and adviser, and author of “The Little Book of Venture Capital Investing: Empowering Economic Growth and Investment Portfolios” (John Wiley and Sons, 2014).
    Thomas C. Gray is an analyst with Gerken Capital Associates .


    Discussion

    Stanley Rich from LA posted over 2 years ago:

    I plan to use crowd funding for my upcoming
    musical comedy about taxpayers and the IRS. It's based on my true story of how I survived a fifteen year battle, won and made the IRS pay legal fees, and then turned it into a successful show for corporate events and fund raisers. Now, we are ready to put it into a live theater and then take it nationwide.

    In this case, I believe the only way I can use crowd funding is to offer perks.

    Legally, I do not think, I can offer a profit participation without it being considered a security.

    I would appreciate any feedback.

    Stan Rich
    (310) 428-3341


    Stanley Rich from LA posted over 2 years ago:

    I plan to use crowd funding for my upcoming
    musical comedy about taxpayers and the IRS. It's based on my true story of how I survived a fifteen year battle, won and made the IRS pay legal fees, and then turned it into a successful show for corporate events and fund raisers. Now, we are ready to put it into a live theater and then take it nationwide.

    In this case, I believe the only way I can use crowd funding is to offer perks.

    Legally, I do not think, I can offer a profit participation without it being considered a security.

    I would appreciate any feedback.

    Stan Rich
    (310) 428-3341


    Michael D. Tilma from NC posted over 2 years ago:

    Thanks for the very informative article. As a younger investor (I'm 30) and an entrepreneur, I have a very high risk tolerance and intend to participate in crowdfund investing. Do you think perhaps you can follow this up with an article on the practical steps to tell a solid company from a dud, or even the pros/cons of convertible notes vs. SAFE agreements or other terms? It would be very helpful to get an experienced venture capitalist's perspective on these things.


    Michael D. Tilma from NC posted over 2 years ago:

    Thanks for the very informative article. As a younger investor (I'm 30) and an entrepreneur, I have a very high risk tolerance and intend to participate in crowdfund investing. Do you think perhaps you can follow this up with an article on the practical steps to tell a solid company from a dud, or even the pros/cons of convertible notes vs. SAFE agreements or other terms? It would be very helpful to get an experienced venture capitalist's perspective on these things.


    Ron Freund from CA posted over 2 years ago:

    This will open up many opportunities for SRI or "green" investors as well. One might add a question to the list of criteria for considering an investment: "Does it align with my values?"

    Already, there are solar and microlending opportunities available to the small investor.

    We are looking into those as well.


    Kevin Cooke from IN posted over 2 years ago:

    Excellent timing as capital seeks growth. I am tracking an Educational rising star set to impact others. Sharing this succinct summary on crowd funding.
    Thank you AAII team !

    Kevin


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