Back on October 26, I told you about one of the most exciting revolutions for investing to happen in years. The new opportunity has to do with an asset class that has delivered out-sized returns for wealthy, elite investors while remaining off-limits to everyone else. 

I’m talking about pre-IPO investing.

As you probably know, before well-known giants like Facebook or Twitter were public companies, they were burgeoning startups. As such, they weren’t traded on the public exchanges most of us are familiar with. 

But as it turns out, certain select wealthy, elite investors were able to get in on these companies before the rest of us. And in many cases, they were able to make millions.

Until now.

#-ad_banner-#You see, thanks to the passage of new regulations, regular investors are able to get in on the same kinds of pre-IPO deals that these “accredited” investors have enjoyed for years. 

And today, I’m joined by Joseph Hogue, Chief Investment Strategist of our newest premium newsletter, Pre-IPO Millionaire. Joseph has researched promising early-stage companies for years. He’s also an expert on the equity crowdfunding platforms investors use to buy a stake in these ventures.

What follows is a brief exchange on equity crowdfunding and what readers can expect from Joseph’s newsletter. This interview was originally featured in a different publication. We have broken it into two parts for readability (stay tuned for part two in tomorrow’s issue). 

Insider: We recently discussed some of the basics of equity crowdfunding as well as the promise it holds for investors. Anything to add?

Hogue: Investing in pre-IPO startups is all about finding those few companies with the potential to disrupt their industries. You mentioned that many of these companies are either going to fail or pay out less than the original investment. So to be successful, you’re going to need to do a lot of research to find the right places to put your money. 

Even then, not every investment is going to be a winner. That’s why you need to be diversified and pick investments that have the potential to return many times your original investment.

To be truly disruptive, the company has to be able to threaten to take significant market share. To have a chance at beating the industry leaders, successful startups have to change the rules of the game. They have to come in with a product or service that upends the conventional model and gives them an immediate advantage. 

That puts the market leaders in the position of either having to spend considerable resources to evolve or die. The other option is to acquire the startup for its own advantage. It’s the only way new companies survive, and it’s something you need to look for in every pre-IPO offer.

Insider: One of the exciting things about equity crowdfunding is the return potential. What kinds of gains are we talking about here?

Hogue: Well, the first-ever exit of an equity crowdfunded company was Republic Project. The deal was funded by MicroVentures. Republic offered a cloud-based digital content system that raised $100,000 in an initial round in 2011 and followed with another secondary round of $250,000. 

The company was acquired by the ad management and distribution platform Digital Generation (Nasdaq: DGIT) in 2013 for $1.4 million, plus additional earn-outs based on future revenue and profitability. That’s a return of 300% on total funding over two years, and not including any additional compensation received if the company met the earn-out hurdles.

Another case is Flurry, a mobile analytics startup, which was acquired by Yahoo for $240 million after it raised $63.3 million in equity funding over six rounds from 2007 to 2013. 

Of course, aside from an acquisition, a company can also choose to go public. The online file sharing company Box did this after it raised $559 million over 11 funding rounds through July 2014. Shares surged 66% on the first day trading in January 2015 to value the company at $1.6 billion.

Insider: That’s incredible. What are some of the good equity crowdfunding platforms out there, and what can we expect from them?

Hogue: Well, there’s Crowdfunder, EquityNet, CircleUp and MicroVentures, to name a few. Companies publish a profile and funding request on one of these sites, providing regulatory documents and other investor information for review. Investors browse through companies and decide if they want to make an investment, which are made directly with the company. 

Startups can raise up to $1 million every 12 months through crowdfunding without the onerous filing requirements it takes to take a company public. Individual investors can put up to $2,000 or 5% of their income each year if their income is less than $100,000 annually. Investors earning more than $100,000 may invest up to 10% of their income annually.

The companies continue to provide regulatory statements and investor communication after the funding, with investors looking to an exit window of usually between three and five years.

Insider: Since this is new territory for most, it sounds like it would require a lot of research to find a startup that can potentially knock the cover off the ball and provide three or four-digit returns. 

Hogue: Right. The wealthy have enjoyed exclusive access to pre-IPO companies for decades, but market education hasn’t been widely available to individual investors. Equity crowdfunding is still a nascent opportunity, and like any new asset class, high risks will only be rewarded to those who can manage the investment. 

If you were to go at this alone, you’d have to not only familiarize yourself with the crowdfunding platforms themselves, but also investigate the deals that are available on an individual basis. That’s a lot of work, but it can be worth it. 

But as you know, that’s why we created this advisory. At Pre-IPO Millionaire, my team and I will follow the equity crowdfunding industry 24/7, separating the best from the worst offers for investment. Not only will I cover up to three deals each month, providing insight on valuation and outlook, but I’ll provide a monthly educational piece to help readers understand the new revolution in alternative finance investing. 

Another big part of the Pre-IPO Millionaire advantage is that it will give you direct access to management. Every crowdfunding investing portal offers a question & answer section, but without really talking to management, you can’t get an idea of the entrepreneur and their ability to do more than just repeat a few talking points they know you want to hear.

Assessing management and the entrepreneur in a crowdfunding deal isn’t always easy to do because you might not have much access. As an analyst, I can usually get a brief conversation with founders and others on the management team but they may hesitate to grant the same time to individual investors. 

Editor’s Note: This concludes part one of our interview. Be sure to check your inbox tomorrow for part two. In the meantime, to learn more about Pre-IPO Millionaire and how you can be among the first to start investing in this revolutionary new space, simply follow this link.