Invest in small businesses and startups, but you may take on substantial risk.
NextSeed is an online crowdfunding investing platform allowing you to invest in small businesses that have the potential to go big. But since many don’t have proven track records, they can be risky investments. So it’s best for experienced investors with appetites for risk.
- Consider NextSeed if you have a high risk tolerance and want to invest in small businesses, startups and real estate.
- Look elsewhere if you’re risk averse and want your portfolio managed for you.
How does NextSeed work?
Think of it as investing in a kickstarter for local businesses. After you open an account, you can browse a list of companies.
NextSeed claims it puts the companies through a thorough vetting process that only 3% of applicants successfully pass. But there’s not much information available on that vetting process, and we weren’t able to confirm if it’s as thorough as NextSeed claims.
According to NextSeed’s website, the organization performs legal and financial background checks on businesses before listing them as investment options. However, businesses provide the interest rates for term notes up front.
There are two main types of investments offered by businesses on NextSeed.
- Preferred equity. Think of these as dividend-paying stocks of sorts. The companies you invest in make quarterly dividend payments to your account. But unlike stocks, you don’t have any ownership in the company.
- Debt investments. These function similarly to bonds. The company borrows money from you and provides you with monthly payments. It agrees to pay you back your principal plus interest within a certain time frame, typically up to eight years.
You can also invest in a menu of commercial, residential and industrial real estate.
But some investment options on NextSeed are limited to accredited investors as defined by the SEC. These are investors allowed to purchase certain investments under federal securities law. Generally, an accredited investor must meet one of the following:
- Earned at least $200,000 per year for the past two years and expects to earn at least $200,000 this year.
- Earned a combined annual income of at least $300,000 jointly with their spouse for the last two years and expects to make at least $300,000 together this year.
- Have a net worth of at least $1 million, excluding personal residence. You can calculate net worth jointly with your spouse.
Federal securities law, specifically Regulation D 506(c), imposes limits on regulated crowdfunding investments, which is what NextSeed offers. Anyone can invest up to $2,200 across all RG crowdfunding investments in a 12-month period. But nobody can invest more than $107,000. Whether your maximum falls in between depends on your income. There are two ways to calculate your maximum.
Option 1. If you earn less than $107,000 or your net worth is less than $107,000, take the lower amount and multiply it by 5%.
- If you get less than $2,200, your max is $2,200.
- If you get more than $2,200, the result is your max.
Option 2. If you earn $107,000+ and your net worth is $107,000+, you can invest 10% of your income or net worth, whichever is lower.
NextSeed offers individual accounts, Investment Entities and self-directed IRAs.
How easy is it to use?
Despite the complexity of its investment options, the NextSeed platform is fairly simple to use. Begin by opening an account online with a minimum investment of $100. Through the website, you can browse different business and real estate investment options. Each lists details like:
- Introductory videos describing the investment
- Funding needed
- Money raised
- Investment minimum
Keep in mind that $100 is the minimum to open an account. Each business has its own investment minimum.
Your account is maintained at NextSeed’s partner bank, GoldStar Trust Company. Payments made by businesses are deposited here. You can withdraw payments or reinvest them in other companies. Because your account is held at an FDIC insured bank, uninvested cash is insured up to $250,000.
How risky is investing with Nextseed?
NextSeed doesn’t offer any specific protection once an investment is made, which means you can lose some or all of your investment.
Your returns depend on the performance of new businesses without a proven track record or ones that haven’t even opened yet. Of course, these could be the next success stories. But you must carefully analyze the risk involved and the position of the businesses you’re considering.
One caveat here is that you take on the risk once you make your investment. According to NextSeed’s website, the money you contribute to any sale on its platform is held in escrow until the company or entity meets its minimum funding goal. That’s when your money would actually be invested.
If the business doesn’t meet its minimum goal, your money would be refunded to your NextSeed account. So suppose a business aims to raise $1 million within the next six months and you invest $1,000 today. Unless the company meets that goal, your money would be refunded.
And while the website doesn’t offer average returns on its investment options, it provides some useful information about the businesses on its menu. For instance, you can find information about a company’s business model, management team and specific highlights. But you should carefully conduct your own research on these companies and their financials before making a decision.
Pricing and fees
NextSeed charges a 2% fee on each payment a business makes to your account. Most traditional brokerages charge an annual asset-based fee of less than 1% on the entire account. Popular ones like Betterment and Wealthfront charge 0.25% annual management fees on their basic accounts. Some charge little-to-no commissions on stock trades. For example, Sofi Active Investing and Ally Invest charge no commissions on stock trades.
So a 2% fee can mean a considerable chunk if a company hands you a large payment. And that’s only from one investment.
But NextSeed doesn’t function like a traditional brokerage. It charges no annual management fees or upfront fees. Its fees depend entirely on your returns from individual investments.
Is NextSeed legit?
NextSeed Securities, LLC is registered with the SEC and a member of the Financial Industry Regulatory Authority (FINRA). So NextSeed Securities, LLC is a legit broker-dealer.
But because it’s relatively young and its investment options may be inherently risky, carefully examine its investment options. These securities are not insured. NextSeed notes on its website, “Investments on NextSeed are speculative, illiquid and involve a high degree of risk, including the possible loss of your entire investment.”
NextSeed reviews and complaints
NextSeed launched its investment platform in 2015 and is based in Houston. It’s not a very well known company, nor is it accredited by the Better Business Bureau (BBB). As of November 2020, it doesn’t have a listing on the Consumer Financial Protection Bureau (CFPB).
But its BrokerCheck profile indicates it has no disclosures. This means the SEC has no record of customer complaints or legal issues relating to NextSeed.
Recent investor user reviews of NextSeed are hard to come by. Reviews on Reddit were generally negative due to the risk involved, but the earliest dates to 2016.
Potential investors should carefully analyze the companies and investment options listed on NextSeed before opening an account. Take a look at its financials, legal history and the experience of its management team.
Pros and cons
- Access to alternative investments. NextSeed allows you to invest directly in startups, small businesses and real estate. Many brokerages don’t offer these options to every investor.
- No upfront fees. NextSeed doesn’t charge annual management fees or commissions as you’d see at other brokerages.
- You don’t need to be an accredited investor. NextSeed provides all investors with options that were once available only to accredited investors. These include debt investments and preferred equity.
- May involve a high amount of risk. NextSeed allows you to invest directly in local businesses and startups.
- No direct advice. NextSeed offers an investment platform, but it doesn’t provide investment advice. Conduct your due diligence and analyze all your options before making an investment decision.
- Investment maximums. Maximums range from $2,200 to $107,000 across a 12-month period.
How do I sign up?
To sign up for NextSeed, visit its website and:
- Click Sign up.
- Create an account with a username and password.
- Use six-digit verification code to complete registration.
- Provide personal information to verify your identity:
- Phone number
- Social Security number
- Choose the type of account you want.
- Browse investment options on NextSeed.
- Click Invest now once you’ve decided where to contribute.
- Provide external bank account and routing number to make your initial investment.
How do I contact NextSeed support?
There are three ways to get in touch with customer service:
- Send an email to firstname.lastname@example.org.
- Call 800-933-0885.
- Leave a callback request in their chat window, but there’s no live chat option.
Compare other investing accounts
If you feel NextSeed isn’t for you, there are plenty of other options out there. Compare your options to find the best fit.
*Signup bonus information updated weekly.
NextSeed could offer a strong opportunity to invest in small businesses or startups that have the potential to skyrocket. But they can also easily fail and there could be serious risk involved. If you’re risk-averse, explore other investment platforms to find the right fit.