2 Reasons Not to Invest on Startup Platforms Like StartEngine

Startup platforms may not be as user friendly as your average broker.

With sleek websites and flashy spokespeople, like StartEngine's Kevin O'Leary of Shark Tank fame, retail investors have begun flocking to startup platforms as pseudo venture capitalists. Are startup platforms the future of private equity listings? Consider these two factors before parking your money on one of these platforms.

1. Liquidity

Congratulations! You invested in the right startup company at the right time and your $1,000 investment is now worth $5,000…on paper. Until you can sell your shares, that $4,000 gain is no gain at all. And if you can't find a marketplace to sell your shares, you may never be able to cash in on your profits.

The trouble with startup platforms is that you can't realize gains like you might on a public exchange. Few startup platforms offer secondary marketplaces to buy and sell shares of startup companies, and those that do may lack enough participants to make investments truly liquid. Public exchanges trade stocks millions of times per day, but as the out-of-the-money options trader, or the niche penny stock trader will tell you, sometimes there just isn't enough interest to make a market.

To its credit, StartEngine offers an Alternative Trading System (ATS) called StartEngine Secondary, where companies may allow the trading of their company stock after an offering. However, companies are not required to allow trading, and the StartEngine FAQ bolds the fact that "Not every company that raises funding on StartEngine will trade on Secondary." Additionally, selling shares on Secondary is not cheap. Sellers incur a 5% fee on every transaction, which is much higher than many top brokers.

2. Cash accounts only

Startup platform users may find that the types of investment accounts offered are lacking in a few key ways. Currently, some platforms offer only cash accounts, leaving out IRAs and other types of accounts.

Another consideration you'll have to make if you strike it rich on a startup platform is taxes. Most startup platforms offer cash accounts only, meaning the same tax advantages are not available to investors who might invest using an IRA. An individual retirement account, or IRA, is a tax-advantaged investment account that defers gains until funds are withdrawn. Another type of IRA is the Roth IRA, in which gains are tax-free subject to holding requirements. With a traditional cash account, however, any gains you realize are yours to pay taxes on in the current year. Like IRAs, joint and trust accounts are not supported by StartEngine.

The trouble with startup funding platforms is that things are frequently oversimplified. Focus is placed on the buying of stock instead of active markets, and tax-dumb cash accounts are sometimes all that are offered. When choosing where to invest your hard-earned money, think twice before buying into the startup platform frenzy.