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How to invest in Private Equity with a Broker Dealer

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An important purpose of investing is to generate a financial return. But what to do when good returns are hard to find? When the stock market is overpriced or underperforming, and cash deposit rates are low, investors may seek alternative investments to find other opportunities to invest their money. 

Venture beyond public markets

Looking beyond the traditional approach of investing in public markets can potentially reduce market correlation, improve diversification, decrease volatility, and provide exposure to potential high-yield investments.

What are alternative investments?

Alternative Investments are any investments that are not publicly traded, meaning they sit outside the traditional markets of stocks, bonds, and cash. There are many different types of alternative investments available as discussed in our article What are Alternative Investments, and should I have some in my portfolio? One option that is rapidly gaining in popularity is Private Equity, where you invest in private companies that are not publicly traded. Venture Capital, Angel Investing, and Crowdfunding are sub-categories of private equity, where you can invest in startup companies.

Alternative Investments are growing in popularity and market depth. Financial data analytics company Preqin in their report Alternatives in 2022, noted the Assets Under Management (AUM) in alternative investments was $13.32 trillion at the end of 2021, and they forecast this to grow to $23.21 trillion by 2026. 

The Preqin report notes that private equity is the largest of the alternative asset classes (larger even than the perhaps more well-known asset class of hedge funds), with AUM of $5.33 trillion in 2021, which they expect to grow to $11.12 trillion in 2026, at a substantially faster growth rate than occurred between 2010 and 2020.

Industry findings from well-respected sources such as Preqin indicate that alternative investments and the key category of private equity may be worthy of consideration for inclusion in an investment portfolio.

What is Private Equity?

i) Venture Capital 

Venture Capital (VC) investors invest in startup companies. It involves people or companies investing capital into a private company in return for equity, with the expectation of receiving a financial return on their invested funds. It is quite a formalized, structured process involving VC funds and VC firms deploying large investments, often in the millions of dollars. You can find out more about VC in our article Build a Diversified Portfolio with Venture Capital on the Propel(x) Platform.

Historically, VC has been for institutional investors, companies, high net worth individuals, and accredited investors typically looking to invest large sums of money. That is now changing, with more investors able to get access to venture capital funds via platforms like Propel(x).

ii) Angel Investing 

Similar to VC, Angel Investing also means investing in startups. It differs from VC by being a more flexible process with lower investments, which can be accessed by individuals using angel investing platforms such as Propel(x). Angel investing typically is for serious investors who meet the conditions of being an accredited investor. Depending on the platform, angel investments can start from as little as $5,000.

You can find out more about angel investing in our article how to start angel investing.

iii) Crowdfunding

Equity crowdfunding allows large groups of people to make investments, usually of small amounts, in a private company. Offerings are conducted via online platforms. Crowdfunding platforms are not permitted to offer any advice and are not required to perform extensive due diligence on any offering.

Investment goals and objectives

Investment goals and objectives will vary depending on the individual and their own personal circumstances. Regardless of how you invest, it is important that you do your due diligence on both the platform you are using and the company that is raising money, because not all websites or companies are legitimate, or a good investment. You should keep in mind that all early-stage investments are high-risk and illiquid.

Some investment platforms are regulated by the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Some other platforms have little, if any, regulatory oversight. Do your research, educate yourself, and develop an understanding of the different types of investments and platforms, and their benefits and disadvantages.

If you want to know if an offering has been registered with the SEC, you can do a company search.  However, you should keep in mind that SEC registration does not mean the SEC has given any type of approval or opinion on the offering. The SEC has investor education pages, where you can find information on private equity investing.

It’s important to identify your investment goals and objectives. Are you a serious investor committed to building a diversified portfolio, taking care of your money, and investing more than $5,000 per investment? Or are you just dipping your toe in the water and having some fun investing a small amount of money? The answer to that question should influence your approach.

How to invest in Private Equity

In times past, many investors have not had access to private equity deals, with opportunities often limited to investment firms and high net worth individuals with a wide industry network and strong connections. But the market has spoken, and the landscape has changed, with new legislation, new technology, and new investment platforms now making private equity accessible to most investors.

The Jumpstart Our Business Startups, or JOBS Act, was a key piece of legislation introduced in 2012 by President Barack Obama. The Act required the SEC to write rules and to issue studies on capital formation, disclosure, and registration requirements, which made it easier for startups to raise capital and gave more people the opportunity for private equity investments.

As a result of the JOBS Act, there came about financial innovation that made private equity and venture capital investments available far more widely than ever before. A key development has been the proliferation of online investment platforms where investors can register and invest in startups or other private equity deals. 

However, not all investment platforms are created equal. The regulation, protection, accessibility, selection process, and level of curation can vary widely between platforms.

So, how do you determine which platforms make the most sense for you? Read on for some discussion on investment platforms.

Investment platforms

Private equity deals may be offered on the following types of investment platforms:

  1. Crowdfunding platforms
  2. Funding portals
  3. Accredited Investor platforms
  4. Broker Dealer platforms

 

1. Crowdfunding platforms

The SEC says Crowdfunding refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people.

Companies can use Regulation Crowdfunding to offer and sell securities to the investing public, giving them the opportunity to participate in the early capital raising activities of start-up and early-stage companies and businesses. 

Crowdfunding is a way for small companies to raise money directly from retail investors, with minimum investments potentially as low as $100. If you are an accredited investor with substantial net worth, crowdfunding is unlikely to move the needle in terms of deploying your capital or generating substantial returns.

In late 2020, the SEC raised the limit on Regulation Crowdfunding offers from a total capital raise of $1.07 million to $5 million. Anyone can invest in a Regulation Crowdfunding offering, but because these deals are high risk and illiquid, unless you are an accredited investor, there are limits to how much money you can invest over a 12-month period.

You can only invest in a Regulation Crowdfunding offer through a funding portal or a broker dealer. Regulation Crowdfunding investments cannot be advertised or solicited directly to investors – companies raising capital in this manner must use a funding portal or broker dealer. 

A legitimate crowdfunding opportunity is required to file a Form C with the SEC providing information on the offering. However, this does not make it a registered filing with the SEC, so there are minimal requirements for companies to provide due diligence information to their investors. This means it is solely an investor’s responsibility to understand the offering. Companies are required to comply with anti-fraud regulations, but this only means they cannot offer a deal that they know or believe is fraudulent. 

It is important to note that not all deals that are posted on a crowdfunding site actually complete their funding, so the deal may not close (in which case, pledged funds are not invested). Crowdfunding platforms are not permitted to offer advice or to pay commissions to anyone for finding investors. Also, the platforms are not permitted to accept client funds, so if there is no intermediary as required by the JOBS Act, you should think twice and do some additional due diligence, because it means that they are not operating under Regulation Crowdfunding rules and may not be subject to any investor safeguards.

You should always do your own due diligence on any crowdfunding offering. Just because it is being offered does not make it legitimate or a good investment. 

2. Funding Portals

A Funding Portal (or, correctly, a crowdfunding portal) is a regulated entity created to facilitate crowdfunding offers but with fewer rules and compliance requirements than a broker dealer. This means funding portals provide fewer safeguards for investors. Funding portals cannot give advice, solicit investors, compensate promoters, or handle investor funds or securities. They do need to comply with basic rules against fraud and misrepresentation, but they do not have strict standards regarding performing due diligence or what information they provide to potential investors. They are not required to evaluate the crowdfunding offer to assess whether it is a good investment, with this task being left totally up to the investor.  

Funding portals tend to have a large number of small deals. But remember, just because a deal is posted does not mean that it will close, in fact it could be open for months or indeed may not ever close.

3. Accredited Investor platforms

An Accredited Investor platform is open only to accredited investors. Investment opportunities are often offered to accredited investors under SEC Regulation D. 

The most typical offerings under Regulation D utilize Rule 506(b). In plain language, Rule 506(b) says that an issuer (the entity that is raising capital) may raise an unlimited amount of funds from accredited investors but is not allowed to widely advertise its offering, and is only allowed to take investments from those investors with whom it has a prior ‘substantive’ relationship. Many high-profile startups raise financing under Rule 506(b), and these may be highly sought-after startups. Due to the constraints of the regulations, such offerings are sometimes only offered privately to a limited selection of investors. 

Until recently, many of these opportunities required investors to move in the right circles and have the right connections. But the rise of accredited investor platforms has enabled access for accredited investors to these sought-after issuers. The platforms source deals via their networks and relationships and manage the relationship with the investors. For example, the questionnaires that investors complete when registering on the Propel(x) platform is one way that investors form a relationship with Propel(x).

Opportunities offered under Regulation D, Rule 506(c) can be advertised to investors, but only accredited investors can participate, and issuers have the obligation to verify accredited investor status. Platforms often take on this role, but this does not absolve the issuer of their responsibility. So, issuers need to be comfortable that the platform is doing a good job verifying investors and should ask for proof of verification.

4. Broker dealers

Broker dealers are regulated by the SEC and FINRA. Investing with a regulated broker dealer provides higher safeguards for investors engaged in private equity investments.

Broker dealers are required to:

  • Perform due diligence on all deals before offering them to an investor. 
  • Perform due diligence on the company owners and executives prior to offering the deal.
  • Provide all material facts, which means they are required to inform investors of the risks associated with the investment and any information that would be needed for an investor to make an informed decision.
  • Obtain information about their clients to determine if they are an accredited investor and comply with the Know Your Customer (KYC) rules.
  • Collect financial information on investors to determine if the investment is potentially suitable for the investor. 
  • Disclose all conflicts of interest, including any payments they receive associated with the offer, whether they are participating in the offer, and if they are receiving some type of security in return for facilitating the offer.
  • Comply with strict FINRA and SEC rules regarding compliance and investor protection.
  • Protect the personal information of investors.
  • Ensure that all information provided to investors is fair and balanced, and is not misleading, exaggerated, or false.
  • Comply with anti-money laundering rules and regulations.
  • Monitor the company on an ongoing basis and provide investors with updates as they become available. 


A broker dealer is less likely than a funding portal to list small deals that do not close. Because a broker dealer must perform due diligence prior to offering a deal, they are likely to only post deals that they strongly believe will have enough investors to close. 

Propel(x) platform

Certain offerings posted on the Propel(x) platform are offered by Hubble Investments LLC, which is a fully-owned affiliate of Propel(x) and is an SEC registered broker dealer and FINRA member. This means those  specific offerings comply with the rules and regulations of a broker dealer, presented on a platform that is informative and easy-to-use. Propel(x) performs strict due diligence on all deals before confirming any investor participation. Importantly, Propel(x) provides curated deal flow for its investors.

Broker dealers must comply with the SEC’s “regulation best interest” rules, which means they are obligated to put the best interests of their customers ahead of their own when they make a recommendation regarding any securities transaction or investment strategy. 

Some key protection measures Propel(x) offers its investors include:

  • We conduct due diligence on all the deals on our platform, which provides a screening process for investors.
  • We have an escrow service available to ensure safe, secure transactions.
  • We share due diligence reports with investors.
  • Investors can pull out of deals.
  • Propel(x) manages its own syndicates, allowing smaller investors to band together and invest as a group to access larger deals.
  • Higher levels of investor protection associated with the platform opportunities offered by Hubble Investments. 
  • We negotiate investment rights.
  • We provide high-quality, curated deal flow.
  • Our platform includes background checks, Know Your Customer (KYC) checks, formal offer documents, complete paperwork, compliance documents, etc.
  • We do checks to ensure investors are suitable and accredited, and the investment is appropriate for their personal circumstances.


A strong motivator for success on the Propel(x) platform is that we also have an upside on the deals, meaning if the investor wins, so do we. We have a vested interest in the success of the deals on our platform. As per regulatory requirements, Propel(x) discloses any potential conflicts of interest by informing investors of any participation in investment deals.

How much money do you need to invest in private equity?

Can small investors invest in private equity? Yes, they can with Propel(x). 

With Propel(x) there are two ways to invest, either direct or through a syndicate. 

A direct investment might be $100,000 or more, which may come with some involvement in the management of the company, such as a board seat or advisory role, depending on the nature of the agreement. 

With a syndicate, also known as a Special Purpose Vehicle (SPV), the investment minimum could be as low as $5,000. Each investor becomes part of the syndicate and invests as a group, with the deal and the equity in the name of the syndicate. Any proceeds are shared among the members of the syndicate after applicable fees and charges have been deducted such as those payable to the syndicate manager.  

Warning

Investors should keep in mind that all private equity offerings have a high degree of risk and are not suitable for everyone. You should evaluate your personal goals, objectives, and risk tolerance prior to investing in an offering that is not liquid. If you need those funds, you will most likely not be able to get them. Past performance is not a guarantee of future performance, so just because a company has had some success does not mean that it will continue to do so. Make sure you review the offering documents carefully and consult with your personal advisors, so you understand the investment and have done your own due diligence prior to investing. 

Conclusion

Adding alternative investments to your portfolio can be a good  way to diversify and potentially increase your returns. Private equity is the largest of the alternative investment classes, which means it may be worth considering for inclusion in your portfolio.

There are three main avenues to access private equity, being Venture Capital, Angel Investing, and Crowdfunding. The choice of which avenue to pursue depends on your own personal circumstances, but can generally be categorized as follows:

  • VC is generally for institutional investors, companies, and high net-worth individuals looking to directly invest large sums of money into startup companies.
  • Angel Investing suits serious investors looking to invest in startups directly or through a syndicate.
  • Crowdfunding suits investors looking to invest small amounts of money in startups without the security and comfort of curated deal flow, due diligence, and investor protection.

If you are a serious investor, you may want to consider using a serious platform, such as a broker dealer like Hubble Investments, who present private equity offerings via the Propel(x) platform.

If you are interested in building your portfolio by adding investments in startups, you can find more information here on how to start angel investing and how to find opportunities for angel investing on the Propel(x) platform.

 

This article is for informational purposes only.  We do not provide legal, financial, or tax advice and investors should consult their advisors prior to making any investment. As with any investment, past performance is no guarantee of future performance, and any investment decision must balance the risk against the potential return.

Private investments are highly illiquid and risky and are not suitable for all investors.  There is no guarantee that a liquidity event will ever take place.

This article contains links to third-party websites. These links are provided solely as a convenience to you and do not imply an affiliation, sponsorship, endorsement, approval, investigation, verification, or monitoring by us of the contents on such third-party websites. We are not responsible for the content of any website owned by a third party and do not guarantee the accuracy, timeliness, completeness, suitability, reliability, or usefulness of any information.

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