How to Invest in Assets You Couldn’t Afford Before
A glimpse at ways the Regulation Crowdfunding revolutionizes investing and wealth distribution.
There is a simple paradox of investing that you need to invest if you want to grow your money. Yet to make a decent amount from investing, you need quite a sum of money already from the beginning.
If you need to invest in real estate, you need at least around 10% of the list price as a down payment in most countries.
To invest in a company early, either you’ll have an annual income exceeding $200,000 ($300,000 for joint income) or $1,000,000 net worth to get access to venture capital funds, hedge funds, or be an angel investor yourself.
To invest in Art, either you’ll have a great network of artists to detect talent very early or a fortune to access the work of a famous artist.
Unfortunately, the system that allows you to gamble in all forms, without any entry barrier gets quite “protective” when you want to invest. Even if you have the necessary skills to detect the right opportunity and complete the due diligence by yourself, you are not allowed to pursue many opportunities.
Although SEC recently decided to expand the definition of accredited investors to allow more people to invest in these exclusive assets, the group is still quite privileged.
The Regulation Crowdfunding
For small investors, the SEC’s more relevant decision is the Regulation Crowdfunding. This law allows small investors to invest in private offerings with a limited amount. The regulation that came effective on May 13, 2016, has updated new limits as below since April 5, 2017.
This regulation has opened several doors and paved the way for many innovative platforms. It’s now possible to take part in a big offering with the small limit we’re granted through them. Yet this is much bigger than the fact that the start-up world’s opportunities are now available to small investors.
Let’s clear the obvious out of the way, and then I’ll highlight some other less obvious investment opportunities later in the piece.
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Investing in promising start-ups at very early stages and the chance of being part of the next Facebook, Uber, Airbnb, etc., is amazing.
Angel investors and VCs that had access to these deals at very early stages made 5x, 10x, 100x, sometimes thousands of Xs from their initial investments. See the visual below for some examples from CBInsights.
Although the amounts you can invest within the annual quotes seem limited, these investments have significant potential upsides. Thus, even a thousand dollars you invest holds to potential to be a life-changing opportunity.
Yet, everyone should be cautious investing in startups as the risk is proportional to the reward it promises. Keep in mind that most of the companies you invest in these stages won’t be around for long, so you’ll likely lose all the money you invested in them.
The aim is to make enough money from your winners to make you forget about the money lost in others.
Now that the obvious is out of the way, I want to talk about a group of assets that I classify as shredded assets.
The naming comes from the fact that you’re not buying the whole investment offering but instead purchasing one of their many shredded pieces. This way, you share both the risks and the rewards with people investing next to you.
As you’re now eligible to invest in private equity within given limits, the variety of asset classes you can invest in is much more than before. Real estate is one of these investment types.
Before the invention of the mortgage system, you needed cash, equal to the price of the house to buy it. The mortgage eased owning a property by paying it over time, yet it’s still a lot of money to pay its down payment and keep up with the monthly installments. So, real estate is still not an early investment option for many people due to its massive entry barrier.
Now that the private equities can be shredded into pieces to be sold to separate investors, some platforms emerged, collecting the full amount of the property through crowdfunding and purchasing the real estate on behalf of all its investors. Think of it as a fund operating in private markets.
You can’t use the corner of an office space or live in the house you own as it’s a shared asset with many others. Yet, you’ll still enjoy the rent it generates, proportional to your stake in the house.
Another shredded asset type available for crowd investing is art.
Art has always been an exclusive investment type for the rich few. It costs a fortune to buy a Van Gogh, Basquiat, or Andy Warhol. The only other alternative is to have a great artist in your close network to buy their pieces before they’re discovered. The odds of that are quite low as it’s tough to know when an artist will make their grand debut, even if you’re sure of their talent.
Allowing art pieces to be shared among investors, like a company, made investing in art accessible to most. It’s truly a key way to revolutionize wealth distribution.
The healthy way to frow wealth through investing is over a long time and through uncorrelated assets. It’s not sustainable to lose all your money in a stock market crash.
The coefficient between the price of blue-chip art pieces and the S&P 500 lies between -0.03 and .19. Such low correlation signals that fine art is more likely to keep its value when equity markets decline.
The most prominent example with famous art offering is Masterworks. Still, there is some competition like Arthena, or it’s even possible to find individual art pieces in known crowd investing platforms.
On top of art present in start-up crowd investing platforms, other types of assets available in these platforms are entertainment companies or single movie productions.
It’s true! You don’t have to be billions of dollars worth of studio to co-produce a Hollywood movie anymore, thanks to the Regulation Crowdfunding.
Many indie filmmakers pitch their movie idea, crew, plot, etc., to collect funding on these platforms. Then they distribute the earnings once the film meets the audience.
Of course, it’s a risky investment as not all the movies profit at the box office. You may even never get your money back, but so investing in a start-up is.
We’re living in exciting times as building wealth through investing had never allowed exposure to such a wide range of asset types to small investors.
SEC and the financial regulator of many more countries allow small investors to try their chance in the big players’ league of investing now more than ever.
Now you may:
- Co-invest in startups with VCs and Angel Investors.
- Start investing in real estate even with your first paycheck.
- Own a piece of a famous painting that is worth millions.
- Co-produce a Hollywood movie with the money you’ve chosen not to spend on new shoes.
The Regulation Crowdfunding and all the similar laws around the world transform investing and wealth distribution significantly. They make all the asset types I’ve listed above accessible and available to most, which was never the case before.
This article is originally published on Medium.
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Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. Use this information at your own risk.