EquityZen Review: They are a unique New York-based brokerage, part of a growing group of alternative online investment and crowdfunding platforms. It offers its retail users venture capital opportunities to invest in privately held companies. These are late-stage but pre-IPO investments with significant upside potential. For this, you will need to be an accredited investor with a minimum deposit of $10,000, and each investment requires a minimum of $10,000. Additionally, investors must be aware that their funds will be locked for two to five years, and such assets have low liquidity. If you are in this market, then this EquityZen review may be your place.
Is EquityZen a Legitimate Company?
Yes, EquityZen is a legitimate company. You just can’t trade them on the stock market. However, their concept is pretty neat as their an alternative brokerage. We found in this EquityZen review that they’re a place to find companies who are pre-IPO. In other words, companies that aren’t trading on the stock market yet.
Remember that a company that hasn’t IPO’d yet isn’t necessarily the best to invest in. In fact, you may want to wait to see how the company does when live. Or be ready to sit through a rollercoaster.
EquityZen’s online platform gives retail investors a place to find pre-IPO companies for investment which are usually only available to insiders and employees. Even so, these investments are still only available to those meeting specific required criteria. EquityZen can do this by purchasing shares from current company stakeholders (who pay EquityZen a 5% fee and receive cash). Not publicly traded, these shares are generally illiquid; EquityZen pays the shareholder cash and then resells the shares to EquityZen retail investors.
How Do I Invest In Pre-IPO Startups?
To be eligible for EquityZen’s pre-IPO investments participation, you must first qualify as an “Accredited Investor.” To do so, the Security and Exchange Commission (SEC) requires all U.S. or international investors to meet one of the following and show proof of such:
- In each of the prior two years, you have earned over $200,000 AND expect to do the same this year.
- In each of the prior two years, you and your spouse’s combined income was over $300,000 AND expect this year’s income to be the same.
- Your net worth or the combined net worth of you and our spouse meets or exceeds $1 million, EXCLUDING your primary residence’s value.
What Does EquityZen Have?
EquityZen’s investments are primarily tech businesses in their late-stage, likely to have an IPO (or similar) soon, provided their given track record and operating history. Only accredited Investors can view the list of EquityZen’s offerings and review any previous rounds’ financing data, share price performance, and other company information.
Availability of these investments relies on sellers of private shares and the company’s approval. Currently, EquityZen has 16 assets available, with others on a waitlist. They also have preview investments that allow investors to express their interest and likely to gain shareholder’s and company’s confidence for investment. Included in the assets are established tech companies with known brands.
These assets are made available to EquityZen clients with a legal and financial trick. The seller is providing stock to EquityZen, and a Special-Purpose Entity (SPE) LLC is created to hold the stock.
EquityZen’s investors purchase a membership interest in the SPE LLC. Investors receive the actual company shares into their brokerage accounts if/when the IPO happens and after the lockup period. For the duration of the SPE-LLC, investors receive an annual K-1 tax statement. For each investment, there is a one-time fee ranging from 3-5% in addition to the amount of investment (like a transaction fee) paid to EquityZen. After this fee, there are no carried interest or AUM fees.
EquityZen also offers curated funds that provide investment in 4-25 pre-IPO companies with the purchase of a single asset–claiming historical fund returns of 15 to 25% for a $20,000 minimum investment in these funds.
How Much Does EquityZen Cost?
They charge sellers a 5% fee when they close out their transactions. If your sales are larger, you could get a break on the charge of the fee. It could be less than the 5% fee. That doesn’t mean to buy larger blocks, however. If you’re worried about the fee’s then keep practicing instead of using real money. That way you can feel comfortable when you’re trading real money.
Risks and Protections
EquityZen’s companies are high-risk/reward private companies. As of June 2020, returns for the 250 companies offered so far have ranged between a 100% loss and a positive 450%. Most provide no expectation of dividends, payments, or cash flow with the potential to lose all of their value. Startup investing is a numbers game with the minority of investors able to obtain high rewards while many others fizzle. The best results are by those that can diversify and are successful in selection. This requires significant funding and relationships with companies that most investors don’t have.
EquityZen is a registered FINRA broker-dealer subject to due diligence requirements, ensuring the suitability of investments for their clients. Note this does not guarantee returns. Their investments are SEC Reg D and therefore meet special rules to provide exemptions but not traditional SEC-registered assets and thus only available to Accredited Investors.
For accredited Investors having the required funding necessary, EquityZen is an excellent place for retail investors to gain access to pre-IPO late-stage investments that would otherwise not be available to them. After doing your research, the safest strategy choice would either be with a well-diversified portfolio of approximately 12-14 companies. Such a strategy would cost a minimum of about $126,000 with fees and require significant research into companies that do not have much information available. One could alternatively invest in one of EquityZen’s curated funds for a minimum of $20,000+fees; EquityZen’s relationships with the offered companies and employee access may make this the better option.
As always, make sure never to invest in a single asset more than you can afford to lose, and good luck with all of your trades.