Investing TW

Netshares - The Evolution of Private Investing

Until recent years, investing in private company securities was confined to extremely wealthy investors, known as accredited investors. The Jumpstart Our Business Act of 2012 expanded and democratized regulations surrounding investments in private securities. The JOBS Act’s crowdfunding offering, Regulation Crowdfunding, opened new avenues for non-accredited investors to support startups and small businesses.

Companies can raise money through crowdfunding in three ways: reward-based, donation-based, and equity crowdfunding. Reward-based funds involve contributions in return for rewards or perks from a company. Examples include Kickstarter and Indiegogo. Donation-based contributions require no expected return. And equity crowdfunding entails monetary contributions in return for an investment--equity, debt, derivative, or a hybrid.

Prior to the JOBS Act, private businesses could only crowdfund via reward-based contributions and donations. These tools can still help companies raise capital for innovation and growth, but they do not benefit donors. With Reg CF, a company can now raise necessary funds while offering advocates an actual investment in a business represented as equity, debt, or both.

The Securities Act of 1933 previously restricted investing in private companies to accredited investors. Until 2012, small companies could only acquire funding via accredited investors, venture capital funds or bank loans. Crowdfunding is made possible by technology allowing people to gather together and contribute small amounts of money to a brand or technology with common values. Companies now have an alternative to the traditional means of raising capital.

The JOBS Act of 2012 paved the way to allow small companies another alternative that combined private capital raises via Regulation D with crowdfunding to create a new form of offering--Reg CF. Reg CF offerings have more limitations than a standard Reg D offering, but they provide a great opportunity for small companies to raise capital in exchange for an actual investment in the company.

Investing in a company begins with reviewing offerings available and understanding any risks associated with those offerings. One can then utilize an online crowdfunding portal like Netshares to transfer funds from one’s bank to make a business investment. Netshares’ online portal immediately emails investors the details of any offerings purchased.

Anyone can invest up to $2,200 in a 12 month period, regardless of his or her financial situation. Restrictions based on annual income and net worth exist for investments greater than $2,200. Amounts limited to the higher amount of either five-to-ten percent of one’s income or ten percent of one’s net worth, but one can always invest $2,200 regardless of these limitations.

Since crowdfunding is centered around small businesses, investors can have a meaningful impact on community development through job creation and local economic growth. In addition, investors can invest in companies that align with one’s values.

Netshares’ primary focus is job creation. Business owners have long struggled to secure funding from accredited investors, business bank loans, and venture capitalists, stunting their ability to create jobs in communities and provide valuable economic stimulus to local areas. Creating customized investment offerings and making those offerings available to investor allows individuals the opportunity to invest in local businesses they already support, as well as new businesses in which they may have an interest.

Investors can choose from a variety of options based on what companies offer. Issuing companies are allowed to offer equity, debt, a hybrid of both, or derivative securities. Equity is one of the most common forms of investment. Equity investors buy shares with the expectation of receiving income distributions and capital gains. Equity shares’ value can rise or fall based on a company’s performance. If an investment generates higher returns, investors can earn capital gains by selling their shares and receiving the difference between the amount for which they bought and sold their shares. Similarly, investors can receive the monetary difference if a company’s assets are liquidated and all financial obligations have been met. But securities sold through private placements are not publicly traded and are therefore less liquid. Investors may also receive restricted units that may be subject to holding period requirements.

In debt investing, interested investors purchase a company’s debt instead of its stocks. Investing in debt essentially gives an issuer a loan. In exchange, a business  will pay investors principal plus interest per an amortization schedule, allowing note holders to make income until the note is paid off. Investors can provide a business with debt capital as a direct loan with a consistent amortization or by purchasing business-issued bonds. The company then makes interest payments to its investors on a semi-annual basis. Debt takes precedence in the capital structure, so in the event a company goes bankrupt, debt is given priority over equity investors. In most cases, the highest debt level is the secured first mortgage bond that has a right to a certain part of an asset or property, for example, a brand name. If an investor loans money to a business and receives a lien on its property or real estate, the investor can take possession in the event the company collapses.

Several types of derivative investments exist, but the most common security offered in private crowdfunding markets is a Simplified Agreement for Future Equity. SAFE investment contracts give an investor the chance to purchase a company security--typically common equity--at some point in the future.

Private investments have the potential to improve the overall health of one’s portfolio. However, because private equity and debt securities are not bought and sold on the stock market like public securities, they are far less liquid and are inherently riskier. Investing in private placements is generally highly speculative, illiquid and carries a high degree of risk, including the possible loss of your entire investments.

The power of diversification is what makes these investments worthwhile. Because private investments are new classes of securities for most investors, they represent assets often much less correlated to the rest of one’s portfolio. These assets’ value may not move in the same direction, at the same time, or in the same amount as one’s portfolio or the public stock markets. Investors will often include private investments as part of a well-diversified mix of holdings with the goal of decreasing the overall volatility of one’s portfolio.

An advantage to investing in private securities via Netshares is that these shares do not move in correlation with the overall stock market. These alternative investments are less liquid than stocks and bonds, however, and should be viewed as a long-term investment, not a short-term buy-and-sell play.

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