Risks and Potential Rewards Associated with Crowdfunding

Fundraising with online platforms can be rewarding but of high risk as well. There are no existing regulations clearly defined to govern it. For example, whether the international tax applies or not when the funding comes into being between countries is not clearly defined. In particular, if the rewards can be considered as sources of income or material possessions, whether it is taxable is not specified, not to mention that the statistics show that almost 50 percent of the new companies failed within the first year. In order to minimize the above risks, a few regulations will be required to guide the crowdfunding activities. However, many governments and their institutions do the regulation by two extreme, they either leave the industry as it is or over regulate it, most probably resulting in killing the innovation that has been borne by this wild finance market that it is. We must be aware of the risks no matter which way the government or institutions choose before embarking on crowdfunding either as a backer or as a creator. As for investors, the following investment mantras must be firmly kept in mind in order to minimize these risks.

As for the investment strategy, I will invest only in products or services I am familiar with or will decide to use myself. In fact, some companies are small and private, or probably not even registered. Audited company accounts as well as business plans may not be available to allow people to find out more about the company.

Since many of the donors are just common people rather than subject matter experts, they might be ignorant on the processes that go into various projects. In particular, people may think others have carried out diligence whilst in essence no one has. As a result, I will only invest in businesses in which I want to be active.

In most cases, the amount of crowdfunding is relatively small and thus is particularly bothered by returns. In fact, many crowd funders write it off as soon as they give the money. Since it is a long term investment and the amount of money people put in today may not be the amount they would see in the future, I will only invest only as much as I can afford to walk away from today. In addition, the law requires that the investment must be held for at least 12 months from the time of purchase if one purchases equity in a business via a crowd fund investment. Therefore, you must think it over and make solid decisions since it cannot be retreated for at least a year.

Always keep in mind the risks as well as the benefits and consider yourself saved. Be careful when you make decisions and have a long term horizon will help.




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Hi. We're not around right now. But you can send us an email and we'll get back to you, asap.

Thanks, Ken

Ken Margolis | Managing Partner Castle Placement, LLC
1460 Broadway Street, Rte 400
New York, New York 10036
(212) 418-1188 | C: (516) 712-7784


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