Our in-depth review compiles crucial details to help you assess whether StartEngine is legit, ensuring you make informed investment decisions.
What is StartEngine and how does it work?
StartEngine is an investment platform designed to facilitate the process of equity crowdfunding, allowing individuals to invest in startups and early-growth companies.
Unlike donation-based crowdfunding platforms such as Kickstarter, where contributors might receive products or merchandise in return for their support, StartEngine connects investors with companies looking for capital, offering them securities (such as equity or debt) in exchange for their investment. This means that when you invest through StartEngine, you are purchasing a stake in a company with the potential for financial return if the company grows and the value of your investment increases.
The platform features a wide variety of industries, from green technology to sports, providing investors with a broad spectrum of investment opportunities.
Once registered, investors can browse through hundreds of investment opportunities, ranging from startups to collectibles. After selecting an investment, the next step is to submit payment, thereby obtaining a financial stake in the chosen company or asset.
Following the investment, individuals can choose to either invest in future rounds, hold onto their investments, or, for eligible securities, sell them on StartEngine’s trading platform. This flexibility offers investors the opportunity to manage their investments according to their financial goals and market conditions.
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How risky is StartEngine?
4/5
— High RiskInvesting in startups and early-stage companies on a platform like StartEngine involves several risks:
1. Market Risk: The value of investments can fluctuate due to market conditions. Startups and early-stage companies are particularly susceptible to market volatility.
2. Liquidity Risk: Shares bought through StartEngine, especially on StartEngine Secondary, may face liquidity issues, meaning it might be difficult to sell your investment quickly or without impacting the price significantly.
3. Regulatory Risk: Changes in regulations affecting crowdfunding platforms, securities trading, or the specific industries of invested companies could impact the value of investments or the ability to trade securities.
4. Company Failure Risk: Startups and early-growth companies have a high failure rate. Investors face the risk of losing their entire investment if a company does not perform as expected.
5. Dilution Risk: Additional funding rounds or issuance of shares by an invested company may dilute the ownership percentage of earlier investors if they do not participate in these rounds.
6. Limited Information: While StartEngine provides a platform for companies to raise capital, the available information about these companies may be less comprehensive than what is typically available for publicly traded companies, making it harder to assess the investment's risk and potential return.
7. No Guarantee of Returns: There is no assurance of a return on investment. Startups and early-growth companies are speculative investments, and it's possible to lose one's entire investment.
Investors should conduct thorough due diligence and consider their financial situation, risk tolerance, and investment goals before investing in startups and early-stage companies on platforms like StartEngine.
How liquid is StartEngine?
1/5
— Minimum LiquidityLiquidity on StartEngine Secondary, the platform's investor trading system, refers to the ease with which investors can buy or sell shares of companies that have previously raised funds through StartEngine. As an Alternative Trading System (ATS) registered with the SEC, StartEngine Secondary facilitates the electronic matching of buy and sell orders for securities between investors, aiming to provide a marketplace for shares purchased via Regulation A+, Regulation Crowdfunding, or Regulation D.
However, liquidity — the ability to quickly sell an asset without causing a significant change in its price — can vary on StartEngine Secondary. Several factors influence liquidity on this platform:
1. Limited Availability: Initially, only companies that have raised funds on StartEngine and meet specific criteria can be traded on StartEngine Secondary, potentially limiting the number of available securities and, by extension, liquidity.
2. Market Hours: Trading on StartEngine Secondary is subject to individual market hours for each security, restricting the time frame within which trades can be executed. This can impact liquidity, as orders are only matched during these specified hours.
3. Investor Eligibility: Access to StartEngine Secondary requires being a U.S. resident over 18 years of age, along with a U.S. bank account, address, and phone number. These requirements could limit the pool of potential investors, impacting the platform's liquidity.
4. Peer-to-Peer Trading: The platform operates on a peer-to-peer basis, with sellers setting minimum prices for their shares and buyers setting maximum prices. While this system facilitates direct transactions between investors, the necessity of matching buy and sell orders can affect liquidity, particularly for less sought-after securities.
5. Potential Expansion: The possibility of including companies that raised capital through other equity crowdfunding platforms and introducing other asset types besides company shares may, in the future, enhance liquidity on StartEngine Secondary.
Despite these factors, StartEngine Secondary provides a valuable avenue for investors seeking to trade securities in startups and growth companies outside of traditional stock exchanges. However, investors should be aware of the potential challenges in liquidity and consider how they might impact the ability to buy or sell shares quickly and at desired prices.
How volatile is StartEngine?
3/5
— Moderate VolatilityThe assets available for investment on StartEngine, primarily consisting of shares in startups and early-stage companies, are subject to high volatility.
This volatility stems from several factors inherent to such businesses, including but not limited to, uncertain revenue streams, evolving business models, market competition, and sensitivity to regulatory changes. Moreover, these companies' valuations are often based on future growth expectations rather than current financial performance, making them more susceptible to market sentiment and investor perception shifts.
Consequently, investors may experience significant fluctuations in the value of their investments over short periods, reflecting the high-risk, high-reward nature of investing in early-stage ventures.
What is the average rate of return for StartEngine?
N/P
— Not Predictable ReturnStartEngine facilitates the process of companies raising capital, but once an offering is closed, its involvement with the company's decisions regarding the listing of shares on a secondary market or any subsequent activities ceases.
As a result, StartEngine does not have control over or insight into the performance of your investment following the close of the offering. Furthermore, StartEngine is not authorized to provide financial advice regarding investment outcomes.
Investors are encouraged to consult with financial professionals to discuss potential returns and outcomes of their investments, as the future performance of investments initiated through StartEngine can vary widely and are subject to the inherent risks of investing in startups and early-stage companies.
What is the minimum investment amount for StartEngine?
$250
The minimum investment amount on StartEngine varies depending on the specific funding round of the company in which an individual is looking to invest. The starting point for investments can be as low as $250, with the average investment amount being around $500.
When it comes to the maximum investment limits, these are determined by the type of offering and the investor's accreditation status. Under Regulation A+ offerings, non-accredited investors are capped at investing no more than 10% of their annual income or 10% of their net worth per year, depending on which is greater. Accredited investors, on the other hand, do not face these restrictions and can invest without limits.
For Regulation Crowdfunding offerings, the investment limits for non-accredited investors are further differentiated based on their financial situation. Those with an annual income or net worth less than $124,000 can invest up to 5% of the greater of their annual income or net worth. For individuals whose annual income and net worth both exceed $124,000, the cap is increased to 10% of the greater of their annual income or net worth.
What is the investment time horizon for StartEngine?
5+ years
The time horizon of investments made through StartEngine varies significantly and depends largely on the individual company and the nature of the investment.
Since many of the companies raising capital on StartEngine are startups or early-stage businesses, investors should generally prepare for longer time horizons. These investments can often take several years to mature, as startups may require time to develop their products, gain market traction, and achieve financial stability or growth sufficient to provide returns to investors.
Investors should approach these investments with a long-term perspective, being prepared to hold their investments for an extended period—potentially five years or more—before seeing potential returns through events like acquisitions, public offerings, or dividends. The specific time horizon can vary widely based on the success and growth trajectory of the individual company invested in.
Who can invest in StartEngine?
International
Anyone over the age of 18 is eligible to invest on StartEngine. For individuals younger than 18, investments can still be made on their behalf through a Uniform Transfers to Minors Act (UTMA) account or a trust set up by a parent or guardian. Prospective investors are encouraged to familiarize themselves with the investment limits and regulations by reviewing the SEC Investor Bulletin for detailed guidance.
However, it's important to note that while StartEngine does not actively market its offerings in the UK or Canada, nor solicits investments from these regions, regulatory authorities in certain UK countries and Canadian provinces have expressed concerns regarding transactions with investors from these locations. As a result of these regulatory positions, StartEngine has chosen not to accept investments from individuals residing in the UK or Canada, aiming to safeguard the interests of the companies listing their offerings on the platform.
Is StartEngine regulated or audited?
SEC Regulated
StartEngine's operations are subject to regulatory oversight and audits to ensure compliance with financial and legal standards, primarily through:
1. Regulation by the SEC and FINRA: StartEngine's entities, including StartEngine Capital, LLC, and StartEngine Primary, LLC, are registered with the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). This registration subjects them to regulatory oversight, including adherence to rules designed to protect investors and ensure market integrity.
2. SIPC Membership: StartEngine Primary, LLC's membership with the Securities Investor Protection Corporation (SIPC) means it must follow SIPC's standards, which include requirements for financial health and operational conduct. While SIPC provides protection against the loss of cash and securities held by a broker-dealer in case of its bankruptcy, it also implies that the broker-dealer is subject to periodic audits and inspections to ensure compliance with SIPC guidelines.
3. Audits and Inspections: As part of their regulatory compliance, StartEngine's regulated entities are likely subject to periodic audits and inspections by the SEC, FINRA, and possibly other regulatory bodies. These audits are designed to verify that the company adheres to financial reporting requirements, maintains adequate capital, and follows proper custody and protection guidelines for investor assets.
These layers of regulation and audits are intended to provide a framework of trust and security for investors, ensuring that StartEngine operates transparently and in accordance with established financial and legal standards.
Is StartEngine insured?
Yes
Being a member of FINRA and SIPC, StartEngine adheres to regulatory standards that aim to protect investors. SIPC membership, for instance, provides a level of insurance to investors against the loss of cash and securities in the case of a broker-dealer's bankruptcy, though it does not protect against investment losses due to market volatility.
Investors are encouraged to use FINRA’s BrokerCheck to review the background of StartEngine's broker-dealer and investment professionals, ensuring transparency and trust in the platform's operations.
Does StartEngine distribute payouts?
No Recurring Payouts
On StartEngine, whether investors receive dividends depends on the specific company in which they've invested and the terms of the investment. Dividends are a portion of a company's earnings decided by the board of directors to be distributed among shareholders. However, it's important to note that startups and early-stage companies, which often raise capital through platforms like StartEngine, typically reinvest their profits back into the business to fuel growth and may not pay dividends in the early stages of their development.
If a company does choose to distribute dividends, the amount and frequency will be outlined in the investment terms presented during the fundraising process. These terms will specify how dividends are calculated, when they are paid, and any conditions that must be met for dividends to be distributed. It's crucial for investors to review these terms carefully before investing to understand the potential for dividend income.
In the context of equity crowdfunding and startup investing, dividends are less common, and the primary focus for investors is often on long-term capital appreciation rather than immediate income. Investors hoping for returns are typically looking for an increase in the value of their shares that can be realized through a liquidity event such as a public offering or acquisition of the company.
How do I get my money back from StartEngine?
An investor can withdraw funds from their StartEngine Investment Account anytime after a 10-day waiting period from the initial transfer. In some cases, for security purposes, additional information may be required to complete the withdrawal process.
What are the annual fees for StartEngine?
Investing in many offerings on StartEngine is free for investors, with the platform primarily earning through fees charged to companies raising funds.
However, some companies may opt to pass on a portion of these costs to investors as a 3.5% processing fee on the investment amount, which is added to the price of shares. This fee, along with the total amount charged and the number of shares acquired, is clearly indicated on the investment form.
For investments made via wire transfer, investors might incur additional fees from their banks for the fund transfer. It's advisable to discuss with the banking institution to understand and cover any such fees. Investments made through ACH and credit card do not carry extra fees beyond the potential 3.5% processing fee.
For those trading on StartEngine's Secondary market, opening an account and buying shares are free of charge. However, selling shares on Secondary incurs a 5% transaction fee.
How do I handle my investments in StartEngine?
After investing in a company via StartEngine, investors have several options for managing their assets, depending on the nature of their investment and the company's actions post-fundraising. Here are key points for asset management as an investor on StartEngine:
1. Transfer Agent Introduction: Post-investment, investors are introduced to the company’s chosen transfer agent, responsible for managing share transfers after the offering closes.
2. Trading on StartEngine Secondary: Companies may opt to list their securities on StartEngine Secondary, allowing for public trading of shares raised through Regulation Crowdfunding and Regulation A+. This platform provides a venue for potentially selling your investment, subject to certain conditions and market interest.
3. Share Restrictions:
- Regulation A+ Offerings: Shares are unrestricted and can be sold freely after purchase.
- Regulation Crowdfunding Offerings: Shares are subject to a one-year lock-up period before they can be freely sold.
4. Resale Restrictions: Generally, investors cannot resell their shares for one year, with exceptions allowing transfers to the issuing company, accredited investors, family members, in connection with death or divorce, or to a trust controlled by or for the benefit of a family member, or as part of an offering registered with the SEC.
5. Market Demand and Liquidity: There's no guarantee that a market demand for securities listed on StartEngine Secondary will develop, potentially affecting the ability to sell shares.
6. Cancellation Rights:
- Regulation Crowdfunding: Investors can cancel their investment up to 48 hours before an offering's close. For rolling closes, a cancellation window is provided.
- Regulation A+: A four-hour cancellation period is offered post-investment, after which the company’s cancellation policy applies.
7. Refunds: Cancellations lead to a refund process involving a 10-day clearing period, with refunds issued within 10 business days. ACH payment refunds can take up to 10 business days to clear.
Understanding these aspects of asset management on StartEngine is crucial for investors to navigate their investment post-purchase, including trading possibilities, restrictions on share resale, and options for investment cancellation and refunds.
How does StartEngine get taxed?
The platform provides some general insights into tax considerations based on the type of entity invested in:
1. Investing in a C-Corporation: U.S. investors generally need to report income for tax purposes only when realizing a gain or loss from their investment. In such cases, investors do not require a K-1 form.
2. Investing in an LLC: Investors in LLCs on StartEngine might need a K-1 form, which the invested company will provide, as it is necessary for tax reporting in these instances.
3. Bankruptcy of Invested Company: Should a company go bankrupt, it (or its trustee) is responsible for providing investors with the necessary tax documents to reflect any loss.
4. Selling Securities in Private Transactions:
- If an investor sells a security acquired through StartEngine at a gain, the capital gain is taxable.
- Conversely, if the security is sold at a loss, this can be reported as a capital loss, which may offset capital gains.
Investors are responsible for obtaining the appropriate tax documentation directly from the entities they invest in, as StartEngine does not send out tax forms. The specific entity type of each investment can be found in the company’s Form C, available in the “terms” section on the campaign page.
How many investors are on StartEngine?
The website received an average of 982,000 visits in the last 3 months.
As of May 2023, StartEngine has facilitated the raising of over $700 million for startups and alternative assets. This capital has been raised through the contributions of more than 1 million users on the platform.
The total amount raised includes funds from various types of offerings, specifically Regulation Crowdfunding (Reg CF) and Regulation A+ offerings, conducted through StartEngine's funding portal and its broker-dealer affiliates. This figure also encompasses StartEngine's own fundraising efforts and includes investments that have been fully closed on, received but not yet closed on, and submitted but not yet received.
Who is the CEO of StartEngine?
Howard Marks is the Co-Founder and CEO of StartEngine.
Prior to establishing StartEngine, Marks had a significant impact on the video game industry through his roles at Activision, a company he co-founded. He served as the Chairman of Activision Studios from 1991 until 1997. During his tenure, he played a crucial role in revitalizing Activision, transforming it from a struggling entity into a leading force in the video game sector with a market capitalization that has reached as high as $37 billion, known for selling millions of games worldwide. Beyond his achievements with Activision, Howard Marks also founded Acclaim Games, a company specializing in online games, which was eventually acquired by The Walt Disney Company.
