Crowdfunding, the new Eldorado of investment?

Crowdfunding is now a mediatic concept and some newspapers don’t hesitate to present it as THE next investment or savings form. It is perhaps going too far. Remain cautious with this type of investment. Invest in crowdfunding only if you want to diversify your portfolio and be aware of the risks involved, in particular for the equity-based crowdfunding and the lending-based crowdfunding. Even the reward-based crowdfunding can be risky. 

As a reminder, reward-based crowdfunding allows contributors to support a project and to get in return a tangible item or service depending of the amount invested. But there are no guarantees that you will receive your reward or that the reward will correspond to its description. Here are some tips to follow if you want to avoid to be fooled by the glossy appearance of some crowdfunding sites or projects.

Choose projects that you understand

To like a project, you must understand it first. 

Inform yourself before investing

The majority of serious crowdfunding platforms give access to a lot of information helping you to make the good choice. Take the time to read carefully the project file and ask questions to the entrepreneur. Don’t hesitate to ask your relatives who know the business sector of the company.

Be aware of the risks

Cases of fraud are not uncommon in the reward-based crowdfunding projects. The US Federal Trade Commission has recently taken legal action against a project creator of a board game. Instead of producing the board game, the project creator used most of the USD 122,000 raised for himself. 

Don’t use funds that you might need in the near future

The amounts allocated to reward-based crowdfunding projects are not very large, the average contribution is about EUR 50, but sometimes, the price requested for a reward can go up to several thousand of euros. All the more reason to be cautious and not to cut unnecessarily corners in your savings.    

In other words, crowdfunding is far from being the new Eldorado but is nevertheless not a mirage. Whatever type of crowdfunding it is (charity, reward, equity or lending), contributors invest with the heart and not with the head and impulsive investment can lead, sometimes but not always, to success.

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