Have you ever thought about investing in a startup?
You weren’t always able to. It wasn’t until the JOBS act of 2012 was written into law that non-accredited, everyday investors could invest in early-stage companies. The JOBS act implemented Regulation CF (Reg CF), allowing all investors to take part in equity crowdfunding.
That’s where StartEngine comes in. The company offers an equity crowdfunding platform for accredited and non-accredited investors alike.
Is StartEngine Legit?
The question of whether StartEngine is a scam is found all over the place online, but after a thorough review, I can assure it’s a legitimate company. The platform was founded by legends who aren’t willing to tarnish their names by being part of a scam:
- Howard Marks. Howard Marks is the tech and gaming guru who co-founded Activision (not Activision Blizzard), a gaming company that’s worth more than $60 billion today. He also founded Acclaim Games.
- Ron Miller. Ron Miller has taken home the Inc. 500 and Inc. 5,000 awards four times — awards given to the fastest growing private companies in the United States. He’s also an Ernst & Entrepreneur of The Year Award finalist.
Beyond who the founders are, they’ve attracted the attention of Kevin O’Leary, Mr. Wonderful of Shark Tank fame himself as a shareholder, advisor, and spokesman of the company.
Moreover, StartEngine.com features SSL encryption, which helps protect you from anyone trying to steal your information while it’s being routed online.
There is one area where the company scored poorly in our legitimacy review, and we were surprised, to say the least. StartEngine currently has an F rating with the Better Business Bureau (BBB). The BBB website explains that the grade was given to the company because it failed to respond to two complaints and two complaints were unresolved.
Before this rating scares you off, however, there are a couple of things you should know about the BBB:
- Favors Business That Pay Up. The BBB favors companies that pay to become Accredited Businesses. This favoritism has been documented as far back as 2015, according to CNN. The BBB fee ranges from $500 to $10,000 or more annually depending on the size of the business. StartEngine does not pay for this badge.
- BBB Doesn’t See All. The BBB only knows about what passes through their system. Some businesses refuse to work with the BBB because of the practices described above. Thus, the two complaints that went unresolved and unresponded to on the BBB platform may well have been resolved by the company directly without using BBB’s system.
We like to look at the BBB to get a feel for how many complaints have been filed and what those complaints are about, rather than paying much attention to the company’s grade.
StartEngine has only received 25 customer complaints in the past year. That’s not too bad for a company that serves more than three-quarters of a million customers; it amounts to a complaint rate of only about 0.0034%. If the service wasn’t legit, that percentage would be far higher.
Key Features of StartEngine
Investing in early-stage startups is an exciting concept. Unless you’re contacting the startups on your own, however, it’s important that you use a quality platform to facilitate your investment.
StartEngine’s platform is one of the best in the industry, offering a wide range of private companies to choose from and tools to assess and contact them.
Wide Range of Companies to Choose From
StartEngine features about 500 companies at any given time. The investment options range in terms of various metrics:
- Issuer Age. You can find brand new companies on the platform as well as businesses that have been around for years and are on the edge of a breakthrough.
- Valuations. Some companies StartEngine features are only worth tens of thousands of dollars while others are worth millions.
- Sectors. Investment opportunities on StartEngine span nearly all sectors, from technology to health care and consumer goods.
- Employees. The smallest companies that raise funds on the platform only employ their founders. The largest company the platform has served employs 70 people.
The bottom line is that whether you’re looking for a very early-stage tech startup that’s currently operating in a garage or you want to tap into a private company with years of experience, StartEngine likely has what you’re looking for.
Detailed Valuation & Fundraising Progress Information
Valuation is one of the most important words in the world of investing whether you’re investing in public or private companies. The goal is to purchase shares of companies at a discount, or at least fair market valuation, and share in the growth of the company over the long run.
Every campaign on StartEngine features detailed valuation information like the total valuation of the company, the percentage of the company that’s being sold to raise funds, the reason the company and its strategic advisor landed on the current valuation, and more.
You can even see the number of investors who currently own shares in the company. This helps you gauge investor interest at the current valuation. If investors see a deal in the making, the number of shareholders will climb.
Easily Contact the Issuer
Part of Reg CF is that companies that use equity crowdfunding as a means to raise funds must be responsive to the investing public and willing to answer questions investors might ask.
StartEngine crowdfunding campaigns make it easy to contact the issuer if you have any questions.
You can leave a message in the comments section to contact a company you’re interested in learning more about. The issuer will reach out to you when they see your comment. In some cases you’ll get a response in a matter of minutes, or you might be waiting a couple of days in others.
If you’re serious about investing in early-stage companies and plan on investing thousands of dollars, you may want to consider signing up for StartEngine’s Owner’s Bonus.
The Owner’s Bonus program costs $275 per year and comes with enticing perks, including:
- Bonus Shares. Get 10% bonus shares when you invest in companies that participate in the Owners Bonus program.
- Collectibles. Collectibles give you the chance to take fractionalized ownership of world-class art, wine, sports cards, watches, comic books, and other valuables.
- Discounted Seller’s Fee. Save 20% on the 5% fee the company charges to sell your shares.
- Waitlist. Move to the front of the waitlist on popular upcoming investment opportunities.
The perks above are great, but signing up for the Owner’s Bonus program only makes sense if you plan on investing thousands of dollars per year .
After all, if you only invest $1,000 on the platform this year, the 10% bonus shares you earn is worth about $100. But if you invest $3,000, the 10% bonus is worth $300, more than offsetting the $275 annual fee you pay for the program.
One of the biggest drawbacks to investing in startup companies is that your shares are relatively illiquid. That means it’s hard to sell your position if you decide it’s time to exit your investment.
StartEngine developed an alternative trading system in an attempt to solve this problem.
The company offers a secondary market where you can sell your shares. However, there are a couple of limitations to consider before hanging your hat on this safety net:
- Seller’s Fees. You pay a 5% seller’s fee when you sell your shares on the StartEngine secondary market. Fees to sell alternative investments are typical. Moreover, only the seller pays the fee. Buyers can buy shares on the secondary market commission-free.
- No Guarantee. There’s no guarantee you’ll be able to sell your shares at a reasonable price when you want to. In fact, there’s no guarantee you’ll be able to sell your shares at all. Your shares will only sell if there’s a buyer willing to pay for them.
The secondary market is nice and it does add a small level of liquidity to these otherwise illiquid investments. But don’t invest money you’re going to need in the near-term in startups because it could be years before you see a return on your investment, if you see one at all.
FINRA Registered Broker-Dealer
StartEngine’s subsidiary, StartEngine Primary, is a FINRA registered broker-dealer. The company is also registered with the U.S. Securities and Exchange Commission (SEC). As a result, the company must follow the same regulatory requirements followed by traditional stockbrokers like TD Ameritrade, Charles Schwab, and Fidelity.
Low Minimum Investments
Alternative investments in startup companies weren’t available to the masses for decades. Now that they are, many are getting involved, but there’s still one major barrier to entry — minimum investments.
Most angel investing or startup equity crowdfunding platforms still require you to be an accredited investor or to make a $5,000 minimum investment. This creates a financial (and sometimes regulatory) challenge for smaller investors who want to get involved.
First off, $5,000 is a lot of money to risk on a high-risk investment. Following the general rule of thumb that you should never risk more than 5% of your investment portfolio’s value on high-risk investments means you should have a $100,000 total portfolio value to make a $5,000 investment comfortably.
Secondly, regulations cap the amount of money non-accredited investors can invest in startups based on their income and net worth and the type of fundraise they’re investing in.
StartEngine makes it easy to safely allocate funds to startups and stay within the lines of the regulatory requirements. Each fundraising program has its own minimum investment requirement, many of which are just $100, although they can be as high as $1,000.
Tools for Raising Funds
If you’re on the other side of the coin — the entrepreneur who wants to raise funds to grow your business — StartEngine is the perfect place to start. It helps with Regulation CF and Series A through C financing. You’re assigned an account manager in the beginning and will be appointed a strategic advisor to help with processes valuation, SEC filings, and the development and circulation of marketing materials.
Advantages of StartEngine
StartEngine has become a popular interface for investors who want to tap into startups, partly because of Mr. Wonderful’s involvement in the business. But that’s not the only reason to consider signing up.
- All Investors Welcome. Although the JOBS Act opened the door for smaller investors to invest in startups, many platforms still shun non-accredited investors. At StartEngine, all investors are welcome.
- Low Minimum Investment. You can invest in a startup with as little as $100. This makes it easy to diversify your holdings while keeping your high-risk allocation to a minimum.
- Easily Contact the Issuer. The StartEngine comments system makes it easy to get in touch with the entrepreneur or team behind the companies you’re interested in.
- Regulation. The platform is regulated by the SEC and FINRA, providing an added level of protection for investors.
- Secondary Market. Although there’s no guarantee you’ll be able to sell your shares on the secondary market, it is nice to know one exists, giving you a potential way out if you decide it’s time to exit your investment early.
Disadvantages of StartEngine
StartEngine is a compelling option if you’re looking to invest in startups. However, there are a few drawbacks to consider before you start investing.
- High Risk. Early-stage companies are some of the riskiest investments you can make. These companies often have little more than a hope and a dream. Those with well-defined products are either in the early stages of commercial development or just starting to sell their product, with no real history to research.
- Investment Caps for Non-Accredited Investors. Although anyone can invest in startup companies thanks to the JOBS Act, there are limitations on the amount you can invest. That’s true of any startup investment on any platform; the limitations are set by regulators to protect you from losses and are based on your income. StartEngine takes active measures to stop investments that might go over your limit.
- Illiquidity. Startup investors don’t typically get returns until the companies they invest in go public in an initial public offering (IPO) or are acquired by a larger company. This process often takes years, if the end goal ever comes to fruition. In the meantime, there’s a strong chance you’ll have no choice but to hold your shares and wait.
How StartEngine Stacks Up
StartEngine and Wefunder are two of the most popular crowdfunding sites online. Check out the chart below to see how the two stack up.
|Buyer’s Fee||3.5% on the primary market. No secondary market fee.||2% to 3.5% depending on your payment method.|
|Secondary Market||Yes (Seller pays a 5% fee)||No|
|Non-Accredited Investors Welcome||On all offerings.||On all except Regulation D offerings.|
|FINRA & SEC Regulation||Yes||Yes|
|Fundraising Campaigns Available||Typically ~500||Typically ~1,000|
If you’re interested in investing in startups, StartEngine is a perfect option. The company offers a wide range of investment opportunities, low minimum investment requirements, and a secondary market to provide some level of liquidity.
However, doing your due diligence is crucial; this is even more important with startups and other alternative investments than with publicly traded companies. These companies haven’t proven themselves and are often operating on a shoestring budget. With such high risk, it’s important that you learn everything you can about the company and the market it operates in before making an investment.