Comparing Equity Crowdfunding Sites
Transparency is key to every oil and gas investment, and one of the major benefits of equity crowdfunding is that investors have the power to demand transparency. Plus, with equity crowdfunding, investors have vast new options to diversify their investments.
Now, you can invest in startups, real estate, and oil and gas via crowdfunding websites. If you educate yourself and take your due diligence seriously, you don’t have to be a career professional in the area you invest in as long as:
- You are benefiting from a transparent investing process,
- You follow a diversification strategy, and
- You make sure your investments follow industry-specific risk mitigation strategies.
So Many Crowdfunding Options!
Crowdfunding comes in many forms, so how do you know you’re getting a good deal? There are three main types of crowdfunding models that you need to know to find the best crowdfunding sites for investors.
The first type of crowdfunding site follows the Kickstarter model or the donation/reward model. It’s pretty simple. A group or individual will typically try to raise capital to build a manufacturing process for a cool new product. You pay X amount of money to help kick-start their process. In return, you get to be one of the first owners of a cutting-edge product, often at a discount over what it sells for later.
It’s pretty simple to tell if you get a good deal or not. Do you feel the product was worth the money you spent? If the answer is yes, then you got a fair deal.
Note: Kickstarter applies a 5% fee on all successfully funded projects and Amazon also adds on a credit card processing fee of 3-5% for successful projects. So, you pay up to 10% of the value of a project to cover fees associated with making the deal happen on the platform. People seem to think it’s fair — Kickstarter has been wildly successful.
Equity Crowdfunding Model
The second main type of crowdfunding site is the equity crowdfunding model. Equity crowdfunding sites (like EnergyFunders and Crudefunders) generally follow the format of the no-action letters issued by the SEC to AngelList and FundersClub in March of 2013. A no-action letter is essentially the SEC enforcement division saying that if a company follows a guideline described in the letter that the SEC will not recommend action for violating securities laws.
What you need to know is that the rules state that the crowdfunding platform can’t charge any fees except third-party fees. The only “payment” an equity crowdfunding site can receive is an equity stake in a project. This is also called a “carried interest.”
Additionally, equity crowdfunding sites can avoid payment transaction fees for the investor by offering e-check, mailing checks, wire transfer or even Bitcoin payment options (we accept all these).
Listing Site Model
The third main type of crowdfunding site is the listing site model. This is essentially a platform where companies or individuals seeking to raise money can post their projects. Investors perform their own due diligence and enter transactions with the project promoters.
In this model, promoters either pay a listing fee to list their project or the website takes a cut of the funds raised for a project, similar to how Kickstarter makes its money in the donation/reward model.
Typically, deals are closed offline between private parties as opposed to being done through the site.
Why Is Equity Crowdfunding a Good Deal for Investors?
While Kickstarter has given the world cool products, it’s donation/reward model doesn’t allow for investments in the companies kick-started.
Meanwhile, the listing site model leaves investors to perform their own due diligence on projects. While the platform has an incentive to do some vetting, these companies make their money on listing fees or transaction fees, so they get paid regardless of whether the investor does. And they often make money from bulk transactions if payments are submitted through the site.
If you’re a savvy investor and want to see all the deals available and you have the time and expertise to vet these deals, the listing site model could be exactly what you need to uncover a diamond in the rough.
However, at EnergyFunders, we think the best crowdfunding sites for investors follow the equity crowdfunding model. Equity crowdfunding sites have built-in checks on bad behavior. Platforms spend their own time and energy vetting projects and negotiating deals with companies seeking to raise capital. The only benefit equity crowdfunding sites may take is a carried interest or equity in the project. This is in exchange for the platform evaluating, vetting and negotiating deals.
An equity crowdfunding site has an incentive to expend energy picking winners because otherwise it doesn’t get paid. If investors get a lousy deal, so does the platform.
Also, equity crowdfunding sites don’t charge fees to companies seeking capital, which benefits those companies. The platforms are fortunate that quality opportunities are presented to them, typically far more quality opportunities than they can process.
Equity Crowdfunding vs. Fee-Based Investing
Don’t get us wrong, fee-based investing is how the world goes round. There’s absolutely nothing wrong with it and there are many honest, outstanding people working in fee-based investing.
However, crowdfunding is a new way of doing business. It makes sense to embrace the equity model, where everyone has a stake in the success of the project. When there’s transparency and fair dealing, it aligns the interests of the deal maker and the investor.
But, finally, we think that an equity crowdfunding site that delivers true due diligence is a big win for investors. Investors can diversify and participate in more projects when their due diligence times are reduced.
Comparing Prices on Equity Crowdfunding Sites
Equity crowdfunding sites first got started primarily with startup financing and real estate financing, but have quickly spread into other niche areas.
In evaluating the cost-effectiveness of an equity crowdfunding site, you have several main factors to note.
- What percentage interest in your investment will you keep after the carried interest?
- How strong is the due diligence analysis, and is the process transparent?
- Does the site automate the closing process and make that as easy as possible?
What equity percentage is taken is objective, while the strength of the due diligence is subjective. But, you need to be satisfied that you got an explanation of a project before investing. This is ultimately what you are paying the carried interest for, to make sure that you got experts in the industry you invested in to vet your project, negotiate the best deal and do their best to pick winners.
Make sure you get your money’s worth and demand strong disclosures that make an effort to explain an investment beyond the typical executive summary or the vague private placement offering that simply checks off all legal boxes.
If the equity crowdfunding site doesn’t automate the closing process, it can lead to a rocky start if other investors don’t follow through, and it can prevent you from diversifying by forcing you to spend excessive amounts of time on each deal. You are also paying for convenience. A completely online deal-closing process saves time and allows you to diversify by stopping you from re-inventing the wheel each time you close.
Additionally, you need to look at project budgets in the due diligence materials to see that your money is being accounted for and also that third-party fees are kept low.
It’s your job to determine the quality of due diligence and the closing process and how well project money is budgeted. We strongly advocate DIY involvement in your investments.
Equity Crowdfunding Site Comparison
Let’s look at the sites to compare their carried interest costs.
For investing through the site, AngelList, one of the first equity crowdfunding sites, charges a flat 10% carried interest. Startups seeking to raise capital pay nothing.
FundersClub charges a higher carried interest with the amount changing on a project-by-project basis but generally 20% for most projects. However, that amount doesn’t kick in until the investment sees an increase in value as determined in a liquidity event (presumably when the company is sold or gets the next round of funding).
At Junction, investors get to participate in financing motion pictures. Junction’s carried interest ranges from 10 to 20% on each project, which can include one or more movie investments.
Which deal sounds better? Which site scores better in usability and soft factors? You decide.
Where EnergyFunders fits in with the others is that it has chosen to charge a flat 10% carried interest on each project. We aim to score high on the soft factors including quality of due diligence and ease of closing (our process is entirely automated).
Oil and gas investments benefit from drilling budgets being standard in the industry as opposed to start-ups and movies which can see budgets fluctuate based on unforeseen events. In wells that we can’t drill turn-key, we maintain operating funds to cover overages so you can rest assured the project will be budgeted for without cost overruns putting it into jeopardy.
But enough about us…
Real Estate Equity Crowdfunding Site Comparison
No price shopping exercise of the best crowdfunding sites for investors would be complete without at least one representative of the real estate equity crowdfunding world. After all, some people prefer bread and butter investments like real estate (and oil) and not everyone wants to finance startups and movies, as exciting as those are.
Realty Mogul is one real estate equity crowdfunding site that has seen a high degree of success offering equity crowdfunding investments. It looks like you’ll have to go into the site itself to price shop the carried interest as the precise amount isn’t listed in the site FAQs (from a review of several sites, it appears real estate crowdfunding sites have carried interest amounts that vary and you need to look to specific projects for this amount; real estate sites may also offer financing via debt purchasing).
A Final Consideration: Believe in What You Invest in
When taking into account carried interest, you need to examine your own attitude toward risk and which projects best fit your mold.
Also, you need to decide what kind of people you are comfortable taking a risk with. What projects will you love to tell your friends about at the next get-together?
You might view real estate as being steady and love that you are helping improve neighborhoods. You might view investing in startups as an exciting way to make new products. And you may be comfortable with long-term investments with hopes for a huge payday (and willing to take the risk that most don’t get this payday).
You might view oil and gas as a high risk (it is) but one where you will know if you are successful much sooner than a startup. And you might take comfort knowing that you can mitigate risk by benefiting from deals structured so that the project only continues if it meets success milestones.
The oil field is full of great stories. It has geologists who discovered entire oil fields. It has engineers who are entrepreneurial. It has small, family-owned businesses that have found a profitable niche drilling for oil in places that the super-major oil companies left behind for offshore oil fields or the Middle East, but which remain strong investments nonetheless. These are the types of stories you’ll find inside the EnergyFunders website.
It’s all your choice where you feel comfortable and who you want to support.
How to Find the Best Crowdfunding Sites for Investors
In addition to checking out the price charged in the form of a carried interest, make sure you evaluate all factors when determining where you can get the best deal. Those include:
- Quality of due diligence
- Ease of closing/automated online closing
- Advance budgeting to protect your investment
Finally, make sure you believe in what you are investing in.
Want to learn more? Contact us or create a free account to view the vetted investments on our equity crowdfunding site and all their details.