Equity crowdfunding is all the buzz right now. The United States will get its first taste of for-profit crowdfunding once the Securities and Exchange Commission approves its draft rules and another regulator, FINRA, does the same. That's right, folks: After taking flight in Australia and elsewhere, small security offerings are coming to America. Get ready for an estimated $4 billion market to get wings right here in the good ol' USA.
As someone who worked on the crowdfunding law as it wound its way through Capitol Hill and onto the president's desk, I am sometimes asked what the average investor needs to know about crowdfunding. Here are some choice tips:
The old investment rules don't go out the window
Crowdfunding is exciting, shiny, and new. But crowdfund investing is still investing; due diligence, self-education, and diversification are investment gospel for a reason. Investing in smaller companies over the Internet doesn't alter the wisdom of time-tested investment habits. To adapt a quote by Steve Jobs, "Stay Foolish."
Keep expectations reasonable
We've never met, but I'm pretty sure we both would say yes to an offer of cheap stock in the next Facebook. That's part of the promise of equity crowdfunding: Some crowdfunding offerings may well take small-time investors from the ground floor to the presidential suite. However, no one knows how often that will happen, and history suggests these cases will be the rare exception. Let's keep it real: A respectable rate of return on your "crowd portfolio" is a more realistic goal than striking it rich.
Know why you're investing
Up until now, crowdfunding was about donating to a cause or project without expecting to share in any profits. Some of these artistic or social initiatives will likely take on a for-profit spin and migrate to the equity crowdfunding marketplaces. Before clicking "invest," decide for yourself whether this is about making money or making something valuable happen. If you're lucky, those goals will align.
The crowdfunding effort received a major spiritual boost from the "localvesting" movement. Even before the SEC and FINRA bless national crowdfunding marketplaces, intrastate crowdfunding is happening in a few states that permit it (like Georgia). As community-based enterprises begin to take advantage of this new capital-raising technique, you might find the best opportunities are closer to home. Ask yourself whether you'll get a bigger real-life return from helping a local coffee shop get off the ground or investing in a far-off gadget company.
No offense to those readers who write fan fiction about mutual fund disclosures, but crowdfunding is making investing exciting again. Now that's something after the Fool's own heart. Lest you get carried away in all the excitement, remember that legal caps on the amount you can invest will protect you from betting the farm on a really cool idea. On the off-chance that a virtual-pet grooming company folds after you invest, you won't be out a huge chunk of change.
More than anything, take the time to learn about this new marketplace and what you can get from it and what you can give back. One of the most exciting parts of crowdfunding is that investors get a loud voice. You can be a big player in a small company, so take up the mantle of activist investor and make your investments a success. You might be just one in a crowd, but you might be surprised at the influence you can have if you try.
Brian Murphy worked for the Senate Subcommittee on Federal Financial Management on the Democratizing Access to Capital Act under then-Sen. Scott Brown. The bill was later blended into the JOBS Act. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.