Title III of the Jumpstart Our Business Startups (JOBS) Act, passed in mid-May allows investors to participate in crowdfunding opportunities to fund new startups. However, there are some limitations that need to be worked out.
"It's a new process. It takes a few visionary people who are willing to try something that's new in order to prove that it actually works," said Ron Miller, CEO of StartEngine, one of the 11 funding portals regulated by the Financial Industry Regulatory Authority as of June 15 under Regulation CF. "There's some hesitancy only because it hasn't been done before."
StartEngine serves accredited and non-accredited investors. The platform currently hosts about 15 companies, with another 30 in process and aims to fund 5,000 companies over the next five years, Miller said.
Although crowdfunding is new for investors, Miller said they should approach it in a way that is "consistent with what we know about good investment strategy in general," and "this particular sector of startup investing and growth business investing should represent the high-risk, high-return sector" of an investor's portfolio.
He suggested most investors shouldn't consider investing more than 3% to 10% of their investment portfolio in these types of businesses, and that they diversify across the startups that they invest in.
"It's really important that individual investors not get so excited about an individual offering that they allocate the entire high-risk, high-return portion of their portfolio to one individual company," Miller said. He also suggested that investors spread that allocation across at least three companies, and maybe as many as 10.
"Our friends the venture capitalists taught us well; that the overwhelming majority of these investments are not likely to work out. However, with a good diversification strategy, the one or two that are going to be tremendously successful are going to offset the losses from the companies that didn't work out."
However, the limitations the regulation places on entrepreneurs may stymie investment at first.
"Raising capital is not an easy process. Even with these new rules, it takes a lot more than simply posting your campaign on a crowdfunding site," Miller said. "There's a strategy and process" for entrepreneurs to create compelling campaigns and promote them.
