What Is StartEngine? Everything You Need To Know About This Leading Equity Crowdfunding Platform

Here’s what you need to know about this leading equity crowdfunding and startup investing site.

StartEngine wasn’t the first equity crowdfunding portal, but it’s quickly becoming one of the biggest. They have had some massive raises on their platform, with StartEngine itself raising as much as $29 million in their most recent raise and several clearing the $20 million mark. Similar to some of my previous reviews and some upcoming ones, I wanted to break down the pros and cons of some of the most popular equity crowdfunding platforms.

What is StartEngine?

StartEngine, like several others, is an equity crowdfunding platform that helps everyday investors invest in startups. It utilizes the JOBS Act to open up various types of equity crowdfunding campaigns, is also a registered broker-dealer, has an alternative trading system license (ATS), registered transfer agent, and more. I note this because they provide a number of services to both startups looking to raise and investors that aren’t typical of many other startups.

For example, as I will get into below, they have “StartEngine Secondary,” which is one of only a few “startup stock markets” in the world. This allows you to actively buy and sell shares in startups. This is important to note because startups are traditionally incredibly illiquid, which forces people to hold for years. Secondary allows people to potentially offload their shares in much less time.

As well they have several other integrations of services, like being a broker-dealer for private securities and a registered transfer agent, so they are said to be rolling out “StartEngine Accounts” soon, which means people hopefully need to own shares across several different transfer agents soon. This will be good for investors and companies alike and simplify many of the processes.

Is StartEngine Legit?

This is what most people are generally worried about when they first discover StartEngine. The answer is Yes! StartEngine is completely legit. While there are plenty of risks involved in startup investing, there is quite a lot of vetting that goes into companies before they are listed, and each raise is qualified with the SEC. There are still good and bad investments on the site, but there is nothing fraudulent or sketchy inherent in the site or industry itself.

Pros:

• Only uses Debt & Equity

• Secondary Liquidity

• Collectibles & Diverse Offerings

• Later stage offerings / Good Success Rate

Only uses Debt & Equity

This is one that I like personally because many of the other options aren’t great. Republic, another leading platform, often uses SAFEs and various crypto-related offerings, and the crypto offerings have consistently done terribly. In fact, every single crypto offering they have done has resulted in +90% losses or more. SAFEs, which are heavily used by both Republic and Wefunder, have various clauses in them that I don’t personally trust. One example is the company's ability to liquidate your position upon subsequent funding and issuance of ‘shadow shares’, among other issues.

Debt and Equity have baked in protections to them that are there for specific reasons surrounding investor protections. For example, boards of directors have fiduciary duties to corporations, and if they breach those duties, shareholders can sue. As a SAFE owner, you don’t get these protections because you don’t own stock in the company. If they go bankrupt, you don’t even have any claims to the residual assets and a host of other issues.

Secondary Liquidity

This one is very unique to StartEngine because it’s the only one in the top 3 with a Secondary market, technically. Republic owns SEEDRS which is a UK-based equity crowdfunding platform with a secondary market, but they have nothing in the U.S.

As I briefly explained earlier, this is something unique and really cool. It’s unclear what the final vision for this is because it’s still in its infancy, but there is a lot of promise. Their offering circular notes they have hundreds of companies signed on to trade, so this means there could be lots of companies outside of StartEngine raises looking for liquidity as well.

While this will help solve a lot of issues with investors' liquidity, another thing to note is the benefits from the company's side. If they can organize liquidity events big enough, founders can have multi-million dollar, short-term liquidity events to help founders and companies cash out on a relatively even playing field and can relieve potential short-term pressures to IPO too early or late. Overall, it’s a really cool perk and one that I am excited to see develop.

Collectibles & Diverse Offerings

Every platform has its own thing, or maybe a few things, that are different. Republic is really big on Crypto, but they also have Fig, which allows people to invest in gaming IP, and they also have real estate investments in various capacities. Wefunder is a slight exception, as they don’t have a specific “Wefunder RealEstate” or anything, but they do have a diverse offering array for things like revenue shares, debt, and royalty deals that are pretty innovative.

However, StartEngine has tried a few things over the years but recently has really focused in on Collectibles. Personally, I am a big fan of this decision because these tend to perform really well over time and tend to do well against inflation. These have pretty established markets, so there’s decent liquidity, and they traditionally outperform the S&P500 with quite a bit less volatility. As well they tend to have the 2nd largest amount of startup offerings on the site, so there is a similarly diverse amount of startups on the site.

Later stage offerings / Good Success Rate

Lastly, one reason I tend to use it and like it has to do with their focus on Reg A’s. Many of these companies end up being later-stage companies raising tens of millions of dollars. This means the time horizon for investing tends to be a bit shorter, and the risk tends to be quite a bit less. This has resulted in doing pretty well on the site, actually. I had a 140% return on one company that did a pre-IPO raise on the site and a few others that have resulted in +1000% unrealized gains. I have done well on the site, so I have been pleased with it all.

Cons:

• Higher valuations

• Sales by selling stockholders

• Legal Troubles

• Not very active on social media

Higher valuations

While they do have lots of later-stage offerings, they also tend to be a bit more expensive. This ultimately forces companies to raise at a bit higher valuations and often means earlier stage companies tend to go with Wefunder then once they raise on Wefunder, they go to StartEngine. This isn’t necessarily a bad thing as it tends to send higher quality companies to StartEngine that have already raised funds. However, it can mean less gains since you got in later.

Sales by selling stockholders

This isn’t unique to StartEngine, but it is becoming an issue. Under a Reg A raise, companies are allowed to “sell stockholders” which means when a company raises money, some of that money goes to a shareholder to cash them out, rather than the company raising funds. Since Wefunder doesn’t really do Reg A’s, this doesn’t really apply to them, but both Republic and StartEngine have quite a few companies that are doing this currently and consistently. I don’t agree with it, and I think it’s a really bad look for anyone that does it and on StartEngine for allowing it.

Legal Troubles

Similar to Wefunder, they recently got fined due to some issues with raises on their platform from 2016–2018. This was only about 1/4th the size and not quite as egregious in my opinion, but still, something to consider nonetheless. Here’s that article if you want to read the whole story:

Not very active on social media

Admittedly, this isn’t a priority and doesn’t matter that much, but they aren’t very vocal or active on social media. Most other platforms use social media as a means of support or troubleshooting, and it can be a good place to interact with the community or ask questions. However, the only real option you have now is email, and that can be slow at times. This means that’s your only option, and there are not many options to talk and collaborate with others since they don’t have any sponsored communities.