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BBC Capital

How to navigate the crowdfunding landscape

  • A new step for the SEC

    Entrepreneurs in the United States are one step closer to being able to raise capital from just about anyone via online investment platforms.

    On Wednesday, the US Securities and Exchange Commission proposed new rules that, if approved will allow individuals to buy into start-ups through crowdfunding portals. As it stands, entrepreneurs can only sell stakes in their start-ups to investors who are accredited - that is, they meet certain standards such as at least a $1 million net worth and have a high annual income.

    Just before the SEC vote, SEC Commissioner Michael Piwowar told the Washington Post that crowdfunding allows small firms to "access capital from sources that were previously unavailable" while giving "all investors, not just so-called accredited investors, the opportunity to invest in entrepreneurs and their ideas at an earlier stage than ever before."

    With more opportunities to invest come new ways for people to raise money - and also new fears about fraud. Here's a look at what you need to know to make the most of crowdfunding - and to protect yourself.

    (Getty)

  • Crowdfund your education or career…

    A small but growing number of young people around the globe are now able to fund their education or early professional efforts by selling equity in themselves to strangers for a small percentage of their future income. Some of the programs also offer mentorship, career counselling and job referrals to investees.

    These are relatively new to the United States investors in exchange for a percentage of their future income. Backers invest in the prospect's future earning potential, not a current project. Prospects agree to a binding repayment contract, much as they would with a traditional loan. Outside the United States, such platforms have been around for more than a decade with varied results.

    Want to know more about how these education and career crowdfunding platforms work - and what the fundees have to say about the experience? Read: Short on Cash? Sell some stock in yourself.

    (Image: Ethan Barr)

  • Getting sold and staying smart...

    Before the SEC proposed new rules for crowdfunding, in July, it adopted a new rule allowing companies to solicit to accredited investors directly for money. That opened up a whole spate of advertising and pitches that many investors - even those with high net worth and incomes - may not have seen before.

    It also stirred worry about potentially misleading marketing pitches. BBC Capital spoke with five financial industry experts about the opportunities and the downsides of this change for individual investors.

    As investors begin to receive pitches about these business opportunities, it may be hard to figure out which are legitimate, particularly early on. "Some people won't be able to evaluate these properly and will lose money - they'll get caught up in the hype," said Michael Goodman, certified public accountant and president at Wealthstream Advisors Inc in New York City.

    What other concerns and questions should investors ask - and what upside might they find - as they begin to receive shiny adverts for direct investment? Read: Investor beware: Advertising blitz ahead.

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  • Protect yourself from fraud in 90 Seconds...

    Financial scams have always targeted the elderly and unsophisticated investors, but now there are some new threats for which everyone should be on guard. Consumer and investor advocates are concerned that in the US, some new financial rules could raise the danger of fraud.

    90-Second Financial Fix examined what you need to know to protect yourself and your loved ones from falling victim, no matter where you live. Watch: Protect yourself from financial fraud.

  • It's not just crowdfunding to be cautious about...

    Nearly five years removed from the multi-billion dollar financial frauds perpetrated by Bernie Madoff and Allen Stanford, multi-million dollar "small-time" frauds are routinely exposed by enforcement agencies and regulators around the world. In fact, in response to Madoff, Stanford and many other frauds exposed during the financial crisis, enforcement activity was dialed up a notch.

    But that hasn't stopped us from getting rooked. Yes, financial fraud is still alive and well. No organization appears to track or even estimate global financial fraud perpetrated by financial advisers, but a lot of it looks, well, the same as it always has.

    What do these schemes look like and how can you spot warning signs? Read: Riskology-Financial fraud: The swindles that just won't die.

    (Getty)

  • Don't call it investing...

    On crowdfunding platforms such as Kickstarter and Indiegogo, artists, entrepreneurs and people promoting causes have an opportunity to turn their ideas into reality. And you, Jane and John Chequebook, get to make it happen as long as you front them a little cash.

    It's a simple concept: an individual or group posts an idea or cause and then markets it heavily to attract funding. On the other side, people search for cool new products or interesting initiatives to support.

    But one thing crowdfunding is not: investing.

    Handing your money over to a crowdfunded idea makes you more a customer than an investor. Customers expect products. Investors expect dividends, interest and returns.

    Confused? Consider what crowdfunding is really all about. Read: Riskology-Fund a fledgling business, but don't call it investing.

    (Image: Harley Schwadron)

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