27 July 2023
Compared with other forms of investment, equity crowdfunding has a number of advantages.
Corporate holdings (equity) are the riskiest class of investment and consequently able to offer much higher returns in the long term , when compared with other less risky classes, such as bonds, direct purchase of real estate or gold. In equity crowdfunding, one can invest in as-yet little-known companies with completely untapped growth potential. It is estimated that 1 percent of startups become "unicorns," meaning they reach a market value of $1 billion.
In real estate projects there can be excellent returns (between 10% and 15%) in a very short time, even at the end of a single year!
These are opportunities made accessible by crowdfunding and that until recently were within the reach of few private investors.
Investing in small businesses that do not have access to large capital markets is the most practical way to support their growth. You can give them a chance to prove themselves and create that product or service that you think should absolutely exist in the market. You can enable the development of a new idea that could change tomorrow's world and contribute to the growth of our country's real economy.
On crowdfunding investments you do not paystamp duty, of 0.2% on the invested assets as is the case with financial securities.
In addition, you can deduct a portion of your investments in startups or SMEs defined as "innovative" from your taxes. These companies are registered in a special section of the commercial register and will be clearly identified as such in crowdfunding platforms such as Mamacrowd. By holding the investment for at least 3 years you will be able to recover 30 percent of the amounts invested from income tax (IRPEF). This is a strong form of incentive that the state gives to push individuals to invest in the real economy: part of our investment is refunded to us as a discount on the taxes we would have had to pay.
In some cases it is possible to recover 50 percent of the sums invested, but only if the company obtains a ministerial certification (stating that the capital obtained by way of facilitation over 3 fiscal years is less than €200,000 within the meaning of Commission Regulation (EU) No. 1407/2013 of December 18, 2013 on "de minimis" aid). however, this certification is hardly obtained this as it is a rather bureaucratic and expensive process.
Investments in unlisted startups and SMEs, or real estate transactions themselves, can be considered decorrelated from traditional investments in stocks or bonds in financial markets. In this sense, crowdfunding can be considered an excellent means of diversifying one's portfolio.
Moreover, it is also possible to have good diversification within crowdfunding itself: by investing in startups, SMEs, and real estate transactions belonging to very different categories and then in different initiatives and sectors within these same categories (We elaborate on this topic in Lesson 5).
The entry thresholds for entering campaigns are really low, the minimum being about €250. With a small amount of money it is therefore possible to invest in companies or real estate deals that raise hundreds of thousands of euros. This is a nice advantage that, for example, is not found in the direct purchase of real estate or investment funds.
The investment process on crowdfunding platforms is very simplified compared to other forms of investment, and only a few online steps are needed, without the intervention of intermediaries, banks or notaries.
In equity crowdfunding, the investor incurs no costs to subscribe to the investment. The platform fee and other administrative costs are borne by the company requesting funding.
Like any investment, crowdfunding to give a return requires managing some risks.
Becoming a partner in a business means putting your capital at risk. This means that in case of business difficulties, partners can lose even their entire paid-up capital (but no more than that). If the business is a startup or SME, the risk can be considered even greater than for large publicly traded companies that usually have been making profits for a long time. The failure rate of startups is very high, which is why it is essential to diversify your investments across many different companies.
Investing in startups or SMEs involves a willingness to wait several years (usually no less than 2-3 years) before the possibility of a return on the investment made (exit) materializes, potentially with a profit (We go into this in more detail in Lesson 3) . We have to wait for the company to go public or to be purchased. If we want to liquidate our corporate stake before such an event occurs, we have to find a buyer ourselves and agree on the selling price. This risk can be managed by investing money that we anticipate will not be needed in the next few years. In addition, we can prefer projects that have the option of Rubrication (We elaborate on this topic in Lesson 4), so as to lower the costs of transferring ownership of the share to the buyer.
Real estate projects have greater liquidity in that already within a year you can return on your investment.
The information available for evaluating a company in an equity crowdfunding offering is less detailed than that in the documentation of a company planning to go public. Verification of this information is also not as a matter of practice subject to an auditing process carried out by independent professionals. As a result, the company's valuation and prospective growth estimates are more subject to margins of error and may be overly optimistic.
This information asymmetry between the investor and the company requesting investment can be managed by using crowdfunding platforms that employ a rigorous selection process (such as Mamacrowd, read explanation in forthcoming articles), carefully examining the documentation made available by the company and in particular the business plan, talking directly with management and relevant shareholders, and finally investing sums appropriate to one's economic possibilities.
A company applying for capital in equity crowdfunding is not subject to disclosure requirements and subsequent supervision by third-party entities such as CONSOB and the Bank of Italy (unlike companies listed on regulated markets). As a result, there may be a risk that the financed company will behave opportunistically and, for example, use capital differently than it has stated in its business plans.
This risk can be managed by investing in companies whose projects are "validated" and "verified" over time by institutional/professional investors such as venture capital funds, business angels, or industry players.
Or discover all the lessons from the "Ultimate Guide to Investing in Equity Crowdfunding".
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