5 best crowdfunding platforms for investing in startups

Crowdfunding offers individuals the opportunity to participate in the growth of promising startups. Gone are the days when investing was exclusive to accredited investors and venture capital firms. Today, nearly anyone can become a part-owner of a business with the potential for returns down the road.

There are three main types of crowdfunding:

• Reward-based crowdfunding: Backers receive rewards, such as products or early access, in return for their contribution.

• Equity crowdfunding: Investors receive ownership shares in the company in exchange for their investment.

• Debt crowdfunding: Investors lend money to a company in exchange for interest payments. This model is similar to traditional lending but often with smaller loan amounts and a larger pool of lenders.

Crowdfunding platforms connect entrepreneurs seeking capital with investors looking for new opportunities. These websites offer a variety of investment models, each with its own set of rules and rewards. Crowdfunding also gives everyday people a chance to invest in promising startups without forking over thousands of dollars.

If you’re interested in investing in small, emerging businesses, here are the best crowdfunding platforms for investors.

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Wefunder is an equity crowdfunding platform that connects investors with early-stage startups. The platform bills itself as “Kickstarter for investing.” However, you’re not supporting an artist or buying a product. Instead, you’re buying a stake in a company, hoping it will grow and increase the value of your investment over time.

If the startup succeeds and grows in value, the shares you own would also increase in value. You can potentially make money by selling your shares at a profit or through dividends if the company decides to offer them to shareholders. However, it’s important to remember that many startups fail, and you could lose your entire investment.

• On Wefunder, you can browse through different companies, read their pitch decks and learn about their business models. Once you’ve picked a company you’re interested in, you can make your investment. The minimum investment amount typically starts at $100.

• You can even use a self-directed IRA to invest in companies listed on Wefunder. According to the company, investors interested in contributing to their IRA through Wefunder can do so by utilizing STRATA Trust IRA.

However, investing in burgeoning companies can be risky business. As Wefunder notes on its website: “Every investment listed on Wefunder is riskier than a public company listed on the stock market.” So only invest what you’re willing to lose.

Wefunder charges investors transaction fees. For bank transfers (ACH or wire), the fee is 2 percent of the investment amount, with a minimum fee of $8 and a maximum of $150. Credit card, Apple Pay or Google Pay payments incur a 5.5 percent fee plus a flat $2 fee, with a minimum of $10.

• Evaluating the potential of early-stage companies can be difficult

• Returns may not be realized for several years, if at all

• Paying with a credit card is expensive

StartEngine is one of the largest equity crowdfunding platforms in the U.S. and claims to have raised over $700 million for over 500 company offerings on its platform since it was founded in 2014.

For investors interested in equity crowdfunding, StartEngine provides a robust platform with minimum investments as low as $100 and you can use a self-directed IRA. With a wide range of startups across multiple industries, investors can explore budding businesses in sectors ranging from technology and consumer products to health care and renewable energy. StartEngine also provides tools to help investors assess company performance and track their portfolio.

StartEngine offers two ways for investors to participate in the growth of new companies: investing and trading.

Investing

• When you invest in a company on StartEngine, you’re essentially purchasing securities directly from the startup through their campaign page.

• You’ll receive equity (ownership) or debt (loan with interest) in the company based on the specific offering.

• Investing typically involves a longer-term commitment as the company grows and develops.

Trading

• Companies that have already raised funds through equity crowdfunding can list their shares for trading on StartEngine Secondary. This is a peer-to-peer platform where investors buy and sell these existing shares alongside other investors.

• Trading offers greater liquidity than investing, so you can buy and sell shares potentially faster, according to the company. However, the availability of buyers varies.

StartEngine also offers a premium membership called Venture Club. For an annual fee of $275, members receive a 10 percent bonus on shares purchased in participating campaigns, along with other perks. However, it’s important to note that Venture Club membership is a separate purchase from investments and doesn’t guarantee investment success.

Many opportunities are free for investors on StartEngine, though some companies raising money may ask investors to pay all or part of the 3.5 percent processing fee. Your bank may also charge for a wire transfer, but ACH and credit cards are free unless noted.

• Lack of information for prospective investors about potential returns

• As with any equity investment, there’s a risk of loss

Fundrise is one of the most popular real estate crowdfunding platforms. Traditionally, real estate investments were usually only available to high-net-worth individuals and institutions. However, Fundrise has opened the doors for everyday investors to participate in this asset class.

You can get started for as little as $10 in cash or $1,000 if you go through an individual retirement account.

Investors can profit from Fundrise in two ways: dividends and appreciation.

Fundrise offers plans focused on either income or growth, or investors can create a custom mix of both.

While Fundrise offers a compelling opportunity to tap into real estate, it’s essential to recognize that your money can be locked in for several years. This liquidity constraint might not be suitable for all investors.

Fundrise charges investors multiple fees. In addition to a 0.15 percent advisory fee, there’s a 0.85 percent annual management fee for real estate funds and a higher 1.85 percent fee for those who decide to opt into the company’s Innovation Fund.These fees might seem steep compared to the often-lower costs of ETFs and mutual funds, which can include no-fee options.

• Investments can be locked in for several years, making it difficult to access funds when you need them

• While lower than some competitors, fees still erode overall returns

Honeycomb Credit is a crowdfunding platform that connects local businesses with community investors.

Investors can browse through business profiles on the platform. Each business displays a funding request, outlining its plans for the borrowed money. Investors can choose to support businesses they believe in by contributing to their loan. The platform typically offers a minimum investment amount of $100, allowing individuals to participate with relatively little money.

Investors primarily earn a return on Honeycomb Credit through promissory notes. Investors lend money to a business and receive fixed interest payments over a specified term (usually three to five years). The interest rates usually range from 5 percent to 12 percent annually, according to the company. The business makes monthly payments, which are then distributed to investors quarterly.

Keep in mind that investing through Honeycomb Credit involves substantial risk. The businesses listed on the platform are usually small and have limited resources, so there’s a big chance these companies may not be able to repay their loans in full, or at all. So it’s possible to lose your entire investment.

Honeycomb charges a transaction fee on each investment. The fee is 2.85 percent of your total investment amount, with a maximum fee of $37.25.

• Small businesses face financial challenges, and there’s a risk of default

• Your investment may be locked up for the loan term

FranShares is a crowdfunding platform founded in 2020 that makes franchise investing accessible for everyday investors. Instead of requiring millions of dollars to open a franchise, FranShares allows individuals to invest as little as $500 in shares of existing profitable franchises.

FranShares partners with established franchise brands to offer fractional ownership opportunities. Once a franchise is listed, investors can purchase shares, becoming part-owners. The franchise continues to operate as usual, generating revenue. A portion of the profits is then distributed to shareholders as dividends.

Additionally, the value of shares could appreciate if the franchise’s performance improves, leading to capital gains when shares are sold.

Income funds typically hold franchises for 10 to 15 years, while growth funds have a target holding period of five to seven years. After the sale of a franchise, investors receive a proportionate share of the net proceeds. Investors can expect to receive distributions quarterly, semi-annually or annually, based on the specific offering.

FranShares imposes a one-time acquisition fee of $500 and an annual fee of $100 per investment.

Crowdfunding platforms are subject to specific regulations designed to protect investors. The JOBS Act of 2012 introduced Title III, which established crowdfunding provisions. FINRA, a not-for-profit organization that helps regulate the U.S. securities industry, oversees crowdfunding platforms to ensure they comply with federal laws and regulations.

Some investor protections on crowdfunding platforms include:

• Investment limits: Limits on how much non-accredited investors — that’s most investors, by the way — can invest in crowdfunding offerings within a 12-month period. The amount is based on income and net worth.

• SEC compliance: Crowdfunding platforms must register with the Securities and Exchange Commission and FINRA to ensure compliance with securities laws.

• Financial information: Companies offering securities through crowdfunding must provide detailed information about their business, financial condition and risks in a document called Form C.

• Cancellation period: Investors have a 48-hour period to cancel their investment before the offering closes.

While regulations provide a safety net, you should always conduct thorough research before investing. Understanding the risks involved and diversifying your portfolio are important. You can also check the registration status of a crowdfunding platform on FINRA’s Funding Portals page.

Crowdfunding platforms offer an accessible way for investors to get in on the ground floor of early-stage companies and real estate projects. However, these investments carry higher risk than traditional securities, like stocks and bonds. It’s crucial to conduct thorough research, understand the specific platform’s offerings and fees, and diversify your portfolio to manage risk. Ultimately, crowdfunding should be considered just one part of a balanced investment strategy.

Learn more: Popular alternative investments

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.