3 reasons not to invest in startup platforms like StartEngine

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Startup platforms can seem like the Wild West to the average investor.

Key points

  • Investments in startup platforms lack transparency when it comes to financial information.
  • Buying investments is easy enough, but you may have trouble selling them.
  • Most platforms only support cash accounts, potentially leaving you with a hefty tax bill.

With sleek websites and brilliant speakers like Kevin O’Leary of StartEngine Shark aquarium fame, retail investors started flocking to startup platforms as pseudo venture capitalists. Are startup platforms the future of private equity listings? Consider these three factors before parking your money on one of these platforms.

1. Verifiability

When it comes to investing in a company, trust is a must for any long-term investor. The problem with platforms like StartEngine is that listed companies are not required to be as transparent as they might be on a public exchange. It’s true that many startups don’t have extensive reporting standards or even revenue to report, but many companies substitute factual information for promotional offers.

Among even the most funded offerings of many startup funding platforms, there is not even a hint of standardized financial statements such as balance sheets and income statements. Instead, some companies point to previous funding rounds to justify their claims and bid for your dollar. Unlike companies that go public on public exchanges, startup platforms may not require financial statements from their companies, leading to unclear prospects for aspiring investors.

2. Liquidity

Congratulations! You invested in the right startup at the right time and your $1000 investment is now worth $5000…on paper. Until you can sell your shares, that $4,000 profit is no profit at all. And if you can’t find a market to sell your shares, you may never be able to cash out your profits.

The problem with startup platforms is that you can’t make profits like you could on a public exchange. Few startup platforms offer secondary markets for buying and selling startup shares, and those that do may not have enough participants to make the investments truly liquid. Public exchanges trade stocks millions of times a day, but as any out-of-the-money options trader or value stock trader will tell you, sometimes there just isn’t enough interest to make a market.

To its credit, StartEngine offers an alternative trading system (ATS) called StartEngine Secondary, where companies can allow trading of their companies’ shares after an offering. However, companies are not required to allow trading and the StartEngine FAQ highlights the fact that “Not every company that raises funding on StartEngine will trade on Secondary.” Also, selling Secondary shares is not cheap. Sellers pay a 5% fee on each transaction, which is much higher than many top brokers.

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3. Cash accounts only

Users of startup platforms may find that the types of investment accounts offered are lacking in several key ways. Currently, most platforms only offer cash accounts, skipping IRAs and other types of accounts.

Another consideration you will need to make if you get rich on a startup platform is taxes. Most startup platforms only offer cash accounts, which means the same tax advantages aren’t available to investors who might invest using an IRA. An Individual Retirement Account, or IRA, is a tax-advantaged investment account that defers earnings until the funds are withdrawn. Another type of IRA is the Roth IRA, where earnings are tax-free subject to holding requirements. With a traditional cash account, however, any earnings you make are yours to pay taxes in the current year. Like IRAs, joint and trust accounts are not supported by StartEngine.

The problem with startup funding platforms is that things are often too simplistic. Financial statements have been replaced by flashy sales pitches, the focus is on buying stocks instead of active markets, and all that’s on offer are tax-dumb cash accounts. When choosing where to invest your hard-earned cash, think twice before joining the startup platform frenzy.

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