StartEngine Review: Online Public Offering
As part of our how to make money series we are introducing our readers to a platform that allows you to participate in online public offerings, a market that just recently opened up to investors of various means. In the following review, we will try to address the frequently asked questions surround StartEngine as well as try to help answer the question if it is one of the best investments to make money or if it is a pass.
What is StartEngine?
StartEngine is an equity crowdfunding platform that brings investors and entrepreneurs together, allowing investors to help fund new businesses by buying shares in the company.
The Company coined the term, “Online Public Offering” (OPO), because the entire process takes place online, with the goal of making it accessible to the entire public, benefiting both the private investor and private company.
StartEngine uses Reg CF and Reg A+ to allow for investments in startups.
Reg CF – When you think of the term ‘crowdfunding’, Reg CF is generally what comes to mind because it’s crowdfunding in its true form. After the campaign has been set up, absolutely anybody can invest in the idea and it all takes place over the internet. With Reg CF, the minimum investment figures can sometimes be as little as $50 and this is thanks to the 2012 JOBS Act (Title III); they wanted the process of raising capital to be democratized. A company can raise up to $1 million maximum under Reg CF.
Reg A+ – For the second investment type, StartEngine also uses Reg A+ and this offers Title IV from the same JOBS Act. Essentially, the Title says that $50 million can be raise from investors that aren’t accredited.
While in the context of crowdfunding investments, a significant number of later-stage growth companies use Reg A+ to raise funds for their own expansion. If they aren’t yet ready for an IPO, they can choose Reg A+ which actually has the nickname of ‘mini-IPO’. Elsewhere, startups may also aim for support under Reg A+ with a much higher limit compared to Reg CF.
With a quick look on their website, you’ll soon find that StartEngine promotes companies of all shapes and sizes. What’s more, they don’t place any limits on industries which means that businesses can come from fashion, electric vehicles, health care, robotics, transportation, food, and even sports.
How Does StartEngine Work?
According to StartEngine themselves, they wanted to create a platform on the internet where businesses and investors could come together. As a mutually beneficial platform, non-traditional investors have an opportunity to invest some savings in businesses that otherwise struggle to raise capital.
Whenever a campaign begins and a company starts looking for investors, they’ll be accessible on the website. For investors, they might come across the business in their search results. From here, they’ll click forward and learn more about the company, the idea, and how much they’re looking to raise.
Investors need to be careful while making decisions because each investment opportunity will have its own requirements. As an example, we came across one opportunity that allowed funds to be withdrawn/sold at the click of a button. On the flip side, just a couple of minutes later, we found another opportunity where the investor was required to hold the shares for a minimum of one year before selling.
If you’re an investor with some money saved, you can get started by visiting the website. To find the best small investment opportunities, you can scroll through the many businesses looking for funds. If you sign up to the StartEngine website, you’ll also receive updates when new investment opportunities become available and this is a huge advantage because it allows you to get there early.
If you’re worried about StartEngine being a bit of a free-for-all, this is actually one of the biggest issues and something that troubles many. In truth, it could be described as an open marketplace because the curation is limited and due diligence is also kept to a minimum. As you might expect, the companies do comply with SEC rules and this is a necessity. However, they’re only ever subjected to the minimum anti-fraud checks and background checks.
Before we move onto the next stage of this StartEngine review, we should also mention that the website ISN’T an investment advice service. Since they have an active role in promoting startups and helping them to achieve their investment targets, it would be illegal of them to then offer financial advice to the investors. If you’re thinking about investing with StartEngine, make sure you feel comfortable before making a decision; consult a tax and legal expert so you know your rights.
With StartEngine, there are two different investment options from which you can choose. Depending on whether or not you’re accredited, this will decide how you proceed with the process. For accredited investors, they need to earn at least $200,000 per year (or have a total wealth of over $1 million) to earn this title. If they’re married, this salary cap will increase to $300,000. If you don’t reach these requirements, you’ll be considered a non-accredited investor which actually makes up for the majority of people on StartEngine.
Within Reg A+, the guidelines suggest that no non-accredited investor should ever invest more than 10% of their income. If their net worth is larger, the rule will switch to 10% of this figure instead. On the other hand, accredited investors have no limits so this is important to remember. Since StartEngine uses Reg A+, these restrictions will be in place.
Furthermore, there are further guidelines laid out by regulation crowdfunding. If non-accredited investors have a net worth or annual income of below $107,000, this means they’ll only be able to invest 5% of whichever is greater as opposed to the 10% we saw with Reg A+. If your earnings are above this, you can use 10% of whichever is smaller of the two.
How Does an Investment Work?
As mentioned previously, StartEngine is a fantastic program for opportunities because it isn’t just about startups. If you want to reduce your risk somewhat, it might be worth choosing growth-stage businesses for your investment because they’re already experiencing some success.
When you choose a startup, you have no idea whether the business is going to do well and you’re relying on the company taking the right steps to learn the market and find their niche in time. If it does work out well, the potential to earn increases many times over.
Since you’re in control of your investment, you can choose whichever industry you wish whether it’s in mobile apps, electric vehicles, solar energy, or any other. When you make your decision and invest some money, it’s important to pay attention to the security because this will differ from one investment to the next. Typically, the investor will receive either a convertible note or stock. Either way, the investment will be direct as opposed to going through an LLC or any other special-purpose vehicle.
The StartEngine Approach
Before we head into the pros and cons of choosing this platform for your investment needs, let’s learn a little more about how StartEngine operates in relation to others in the market. Firstly, investors don’t have to pay any fees which is commonly found on websites like this because you’re helping the startup. Therefore, the startup will pay a percentage of the amount raised; with StartEngine, this is normally between 5-8%.
From the outset, StartEngine informs investors of the risk and this honesty is certainly a positive feature to have for all visitors. With the majority of startups, they tend to lose a significant portion of their value in the early stages. From here, it’s up to the leadership and the idea itself to see whether or not it’ll succeed.
With no dividend or interest payments, it can be a worrying time just waiting to see if the company comes through and this is the risk involved in any investment. With some investments, you might even have to wait for at least a year before selling your shares so you always need to read the small print and make sure you know how it all works.
Pros of Choosing StartEngine
How do we see whether StartEngine is worth your time? For us, a good list of pros and cons will always be a great step to take. Here, you’ll see exactly what’s good and bad about the platform. If you can forgo the negatives, it might just be the investment platform for which you’ve been waiting.
Superb Selection of Investment Opportunities – At the time of writing this StartEngine review, there are 78 investment opportunities and they cover a broad scale of industries. For example, there’s a solar company that’s raised over $6 million through more than 4,000 investors alongside an electric bike company. When searching through, you should find a general theme of innovation and this is something else we like.
Rather than finding people riding their luck looking to raise money for a business ‘idea’ when all they really want is money for a vacation, they’re genuine opportunities and you can see exactly how much they’ve raised along with how many investors have supported the cause. If we choose a swimwear opportunity as an example, we can click on the campaign to see more.
Initially, the first thing you’ll spot is the explanation that it’s a Title III investment opportunity and then you’ll see the company’s location, the amount they’ve raised, their target, and how many days are left. From here, you can scroll down and read the pitch along with some key statistics including global attention, margins, growth statistics, and information regarding customers.
Brilliant Investor Presentations – With some crowdfunding-type websites in the past, the company looking for investment is limited in the information they can provide. For example, they might talk about their business a little and why they need your money but this is about it. With StartEngine, the best campaigns will take a good ten minutes to read because of the sheer amount of information available.
As we’ve just seen, you can read about the company and their position within the market. However, the campaign managers also have an opportunity to create updates about the business whether this is a sales update, the progress of the business, or maybe a feature inside a highly-regarded magazine.
Once you’ve finished reading the presentation, this is then topped off with the comments section where investors can ask any questions they have. For example, you might want to clarify something you’ve read before investing your hard-earned money. For the best run campaigns, you’ll soon have an answer and this might either put you off or be the answer you need to part with money.
Low Investment Minimums – For many years, the word ‘investment’ brought around images of people in suits who like to enjoy seven different vacations each year. Today, absolutely anybody can invest and this is thanks to the low investment minimums. With some as little as $50-$100, you don’t have to take a huge financial risk when investing in a company; losing $100 is much better than losing thousands.
If you find that “gem”, it could be one of the best small investments you ever make. And with such a low investment minimum, there are therefore more opportunities to create a portfolio while adhering to an investment strategy. For example, $1000 could be split between five different companies and this reduces your risk. Rather than lumping the full amount into one company, you’ll still have opportunities to make money even if one (or even four!) of the startups don’t work out as planned.
Investment Perks – Finally, most of the campaigns on StartEngine have perks for those who invest and this is a great benefit for all investors. Depending on how much you invest, these perks might get progressively better. For example, we found one campaign that offered a lifetime discount of 20% for those who invest over $100. However, this increased to 50% for $500 and anything over $1000 included store credit of 10% of the investment.
As we’ve already discussed, there is no immediate return on these investments so this can often leave investors feeling a little short-changed; even if there’s a brilliant chance of making money in the long-term. Therefore, these perks make the playing field a little fairer. Since the business is getting some important funds to put towards their brand, they can offer you something in return through a discount, sample product, or whatever it may be.
Cons of Choosing StartEngine
As you can see, these four benefits make it very tempting to log on and start investing immediately. However, we always like to be cautious and this leads to our final section of this StartEngine review; the drawbacks you might experience. If you’re willing to overlook these drawbacks, you can move ahead with confidence but they still need some consideration.
Risky Investment – Although this perhaps isn’t necessary because you should already know, any investment you make through this website will have some degree of risk attached. Sadly, there are no guarantees in business so, once the investment is made, you’re hoping for the business to take off and enjoy some success. With thousands of young businesses failing every year, you should only ever invest if you feel comfortable while appreciating the fact you could lose some or all of your investment.
Furthermore, your investment is also illiquid which means you won’t have access to it after it has left your bank account. While some investment opportunities allow you to access your money, the process of startup investment doesn’t provide this option.
Despite not being able to eliminate risk from your investment, you can certainly reduce it and this is what we discussed previously with the idea of creating a portfolio. With some beginner investors, they set aside some money to invest on StartEngine and then lose it all when the company doesn’t work. Why not spread your risk and invest in several companies?
Accepts Credit Cards – If you don’t have a credit card or aren’t planning to use it when you invest, this might not apply to you but our next drawback of StartEngine is more of a moral point. When choosing to invest, the website gives you the option of paying with a credit card and we think this is a little irresponsible. For those who don’t understand the risks or are in a financial hole and are therefore making bad decisions, they could invest money they just don’t have on a project that won’t yield a return for some time (if at all!).
Considering financial agencies and the government are trying to clamp down on industries taking advantage of people with credit cards, such as the gambling industry, this is something that probably should change in the future since it brings an air of neglect and irresponsibility to a company that offers so many benefits as we’ve already seen.
Lack of Curation – With many other programs and platforms on the internet, you’ll find that they curate the content on a regular basis. With StartEngine, it’s more of an open platform where businesses can post their ideas so long as they pass the anti-fraud and background checks.
Does this make the platform unusable? In short, no. As we saw earlier, there are only 78 investment opportunities available right now so it’s not as though there are thousands of people all trying to earn money for their business. Secondly, the amount of information available for each opportunity allows you to feel as confident as you’re ever going to be when investing online. If you have questions or concerns, the comments section can be utilized and you’ll get the answers (whether the ones you were hoping for or not!).
Company-Set Valuations – Finally, the platform doesn’t have any control over the valuations which means the companies set them alone. Ultimately, this means you’re going to come across confident business owners who overvalue the business and everything offered for your investment. Therefore, you need to remember to take the numbers with a pinch of salt and make your own mind up rather than getting enticed by some made up figures.
With all four of these negatives, you might not find them a problem or you might even find a workaround so you need to assess what’s right for you. Rather than allowing the startup or growing company to form your opinions, read through the investment opportunity, take a few days to think about it, come back and read it again, and then formulate your own opinions and you’ll have the best chance of success.