An Overview of Digital Crowdbased Alternatives to Listed Shares for Private Investors.
Crowdinvesting, crowdfunding, crowdsourcing etc.: More and more you come across concepts whose underlying idea is the 'crowd'. In this article, we look at crowdinvesting from the investor's perspective and highlight both the advantages and disadvantages of the trend.
The Most Important Facts about Crowdinvesting in a Nutshell:
- Seeking capital is one reason for crowdinvesting. Private investors can share in the company's profits by exchanging their money for the company's shares.
- Often, companies with a strong community opt for crowdinvesting. Start-ups also like to make use of crowdinvesting.
- For crowdinvesting, a company does not have to be listed on the stock exchange: Thanks to tokenized shares, trading can be carried out quite easily and securely on a specially set up website.
- Unlike traditional investments, crowdinvesting offers the possibility of diversification in the private sector. Potentially higher profits in the private sector must be weighed against the correspondingly higher risks.
- Crowdinvesting asks for some additional research from the investor's side
What is Crowdinvesting?
For companies, crowdinvesting refers to a special form of selling company shares. A company that wants to realize a project or invest in its growth can thereby enable the purchase of its company shares on its own and specially set up website (i.e., Investor Relations Page). Crowdinvesting differs from the traditional sale of shares in that, thanks to the tokenization of the shares*, it does not have to go the classic route of initial public offering on a stock exchange to be publicly available. Crowdinvesting is thus especially popular with companies that have a strong community, because their fan base often buys from the company itself and recommends it to others anyway. Crowdinvesting is also very attractive for startups, because until recently, going to venture capital firms for large financing was almost unavoidable.
Through a service provider like Aktionariat, you can add a Brokerbot to your own website. This way, seller (the company) and buyer can easily meet online
Thanks to crowdinvesting, however, SMEs without VC funds are now also able to raise large sums of money, as the example of Nikin shows. The clothing company from the canton of Aargau launched a crowdfunding campaign in 2022 and sold shares in the company to its community for over five million Swiss francs within a few weeks. Another example of a company that wanted the community to participate not only in the economic success but also in the further development of the business is the crowdfunding platform Wemakeit. With the help of Aktionariat, the company had raised over 5,000 new holders and more than 7 million Swiss francs in just over a month in the summer of 2022.
*You don't know what tokenized shares are? Then it's best to read our blogpost about tokenized shares.
Why are Crowd-Based Systems Experiencing a Boom?
Crowdfunding, crowdlending, crowdinvesting... More and more often we encounter concepts that count on the mass of people. There are many reasons that have contributed to the boom of such crowd-based systems in recent years. In our opinion, these are the main reasons:
Trend 1: Online Crowdsourcing
The best example of a project that continues to grow steadily to this day thanks to interested volunteers is Wikipedia. The online encyclopedia exists only thanks to the work of numerous like-minded people who believe in the project and recognize its value. Recently, however, private companies such as BMW have also benefited from the crowd, using their fans to generate ideas. One example from Switzerland is Migipedia. On a specially created platform, Migros customers can ask questions, submit complaints, and suggest ideas.
Trend 2: Fintech Boom
Social platforms such as WhatsApp, Facebook & Co. have been available on the market for a long time. But in the financial world, there has been a particularly large growth in fintech companies in recent years, offering a platform to make payments or buy shares through an app.
Trend 3: Globalization
The more the world is digitally connected, the more globalization is advancing. Projects are no longer implemented locally, but teams form across national or even continental borders. The new way of working together requires innovative platforms and technologies that make this possible in an efficient way.
Traditional Forms of Investing vs. Crowdinvesting
Do you want to participate in a privately owned company? We have compiled the advantages and disadvantages of the different forms of investment for you.
Advantages and Disadvantages of Traditional Investments (e.g., Savings Account).
Advantages of a Savings Account
The savings account is considered a safe investment. Thanks to depositor protection, bank customers benefit from a secured capital of up to 100,000.- should the bank file for insolvency. Another advantage is simplicity. Unlike stock trading, traditional investments do not require a great deal of prior knowledge. For the vast majority of the baby boomer generation, it was therefore clear: money is best left in a savings account. Who wouldn't have done that, back in the days when you got 3, 4 or even 5 percent interest on your assets in the bank, this strategy made sense.
Disadvantages of a Savings Account
In today's low interest rate environment, it may be worthwhile to look for alternative ways to invest your savings. In addition to the low interest rate, the often long duration of the commitment and the slow asset growth can also speak against the classic investment.
Advantages of Crowdinvesting
In legal terms, crowdinvesting is a purchase of securities. This means that as an investor, you purchase share certificates in a company.
Crowdinvesting can be interesting for you if you are really convinced about a company - not only about their economic successes, but especially about their mission. Crowdinvesting allows you to easily and quickly become a business owner of your favorite companies. However, you have to be careful here. Not all companies offer real shares with voting rights.
Yet, if this is the case, you can actively participate in the annual general assembly after the purchase and positively influence the company. In addition, in the optimal case, even an increase in value of the shares can result—but this depends on various factors and is by no means guaranteed.
Disadvantages of Crowdinvesting
As is usually the case with securities trading, there is also a risk of total loss with crowdinvesting. There is thus a high risk compared to classic forms of investment. This is especially true for investments by start-ups because they have not yet existed for long and are thus little established. It is therefore very difficult for private investors to make predictions about the potential financial gain.
In addition, some company shares acquired through crowdinvesting are so-called subordinated loans. This means that if a company files for bankruptcy, all other creditors receive their promissory bills first—before the crowdinvestors.
If you want to get voting rights on your investment, you should make sure beforehand that you do not buy participation certificates, but voting shares (companies that Aktionariat was allowed to help tokenize all sell voting shares, with few exceptions).
How does Crowdinvesting Perform in Terms of Returns?
Some shares displayed in Aktionariat's portfolio app show an increase in value of over 20 percent. However, there is no overall overview of the returns actually generated via crowdinvesting. In addition, general statements on returns are also difficult because the range of available companies is very large and diverse.
Therefore, rely on the same rules for crowdinvesting as for any securities trading:
- Inform yourself. Before each investment, you should inform yourself sufficiently about the company and their plans. At Aktionariat, for example, you can do this at the regular investor events. Also, get professional help before you actually want to invest!
- Diversify. Never put all your eggs in one basket - especially not your savings, on which you may still be dependent.
- Consider the investment terms. The sooner you want to get the investment back, the more important it is to know the terms.
Whether you decide to participate in crowdinvesting or not: It pays to stay informed about tokenized shares. More companies are regularly deciding to tokenize their shares or start a crowdinvesting. Maybe one of your favorite companies will soon be among them?
You can already check out who's selling company shares to the public thanks to Aktionariat's technology.
Can You Make Money with Crowdinvesting? It Depends.
In our globalized world, technologies are becoming normalized, which not only democratize business, but also make it easier for people to connect. Crowdinvesting is suitable for all small and private investors who believe in the mission of a particular company or want to help realize a project.
Unlike traditional crowdfunding, in return for a financing, one does not only receive a good conscience or a "goodie" in the form of a product or voucher, but one acquires company shares and thus also participates monetarily in the company.
Depending on the securities acquired, one also receives voting rights. This enables you as a loyal fan to swap or combine the role of customer with that of a company owner.
Finally, to answer the question of the title of this blog post: Yes, with crowdinvesting it is possible to make money, but as with any trade in securities you have to be prepared for possible negative outcomes. Furthermore you should consult a professional advisor and the founders of the company before making an investment. Also, read our disclaimers for more information.
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