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What Happens to My Crowdfunding Investment?

As I mentioned in the risks of Crowdfunding, after you make your investment, your money could potentially be tied up for a long time – in most cases up to several years.  So what happens to your investment after you put your money in and how do you stay informed on the progress of your companies?

It still is to be determined what the SEC (the rulemaking body) will require the platforms to do, but most top tier platforms (and potentially all platforms, depending on the SEC) will be the link between you and the companies in which you invest.  When choosing which platform to use, you should consider what happens not just before you invest or when you invest, but after you invest, specifically in two key areas: 1) how is my investment doing? and; 2) when do I get my money back?

To follow your investment after you invest, the platform you choose should have an easy way to link you to updates and documents posted by each of your investments.  That way, whenever the company has an update or news, you will have access to the information.  You would not want to invest in a company and not know anything about how the investment is doing, so make sure that your platform provides a way for your investment companies to get you updates.  At a minimum, you should be receiving periodic financial updates, and every time a material news event or update arises, you should be notified, as well.

Now that you know how your investments are performing, how do you know when you will get your money back?  To reiterate the post on risks, your money will likely be tied up for a long time before you see anything in return, if anything.  That is because in equity-based Crowdfunding, you have to wait for what is called an “exit event,” before you get a return.  Some common examples of an exit event would be if one of your investment companies sells to another company or if your shares are bought out by other investors.

For example, if you bought shares in a company that makes organic apple-mango-papaya juice, Tropicana may like the company enough to buy all of its shares – that would be an exit event, and you would get your money, plus any returns or minus any losses.  Or maybe the management team of the company owns 80% of the company but they want the full 100%, they would buy your shares from you and the other Crowdfunding investors (the remaining 20%, let’s say), and that would be an exit event.  As you can imagine, these events usually take several years to materialize, but when they do, you will possibly get all of your money back, and maybe even a hefty return.

You may want to revisit the “How to Be a Savvy Crowdfunding Investor – Part 2” post to refresh your memory on how to mitigate the risk of having to wait so long for your money.  The key strategy to mitigate this risk is to know your investments’ plans for an exit strategy before you invest – that way, there will be no surprises when your money is tied up for a few years.  If they say, for example, that they want to grow their business by five times over the next three years before selling to a larger company, you would know before you invested that you will likely be waiting at least three years for your money.  In addition, as long as your Crowdfunding platform requires regular updates from your companies, you should always know where your investment stands and get an idea of how much longer it will be before an exit event occurs.

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This entry was posted on September 19, 2012 by in Crowdfunding Basics, New to Investing and tagged , , , , .
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