Web3 represents a new phase in the evolution of internet technologies, one that emphasizes decentralization, blockchain-based applications, and user control over data and digital assets.

As the popularity of Web3 startups has been growing in the last couple of years and the Web3 market is projected to reach USD 177.58 billion by 2033,* some individuals may be interested in investing in Web3 startups.  However, while investing in Web3 may offer exposure to emerging technologies and new models of value creation, it also involves a high degree of risks, technical complexity, and regulatory considerations.

*This projection is not a guarantee of future performance and should not be relied upon as investment guidance.

This informational article outlines the important steps on how to invest in Web3 startups while ensuring compliance with broker-dealer requirements and relevant FINRA and SEC regulations.

Understanding Web3 Technology

Web3 generally refers to the decentralized internet built on blockchain and related technologies. Unlike traditional Web 2.0 platforms, where data and services are controlled by centralized companies, Web3 platforms aim to shift power to users and communities by using distributed ledger systems, smart contracts, and token-based governance.

Applications of Web3 include:

• Decentralized Finance (DeFi): Protocols that facilitate borrowing, lending, and trading without traditional intermediaries
• Non-Fungible Tokens (NFTs): Digital assets with unique characteristics often used for art, gaming, or identity
• Decentralized Autonomous Organizations (DAOs): Community-governed entities that operate via transparent smart contracts
• Decentralized Applications (dApps): Web3 versions of apps running on blockchain networks

The rapid development of this sector has attracted both technical contributors and individuals seeking exposure to the next generation of internet-native platforms.

Steps to Invest in Web3

1. Educate Yourself

Before making any investment, it may be helpful to build a foundational understanding of Web3 concepts. Topics such as blockchain mechanics, smart contracts, token utility, and governance frameworks are relevant when evaluating projects. Educational resources, including whitepapers, online courses, technical blogs, and regulatory updates, may provide useful background.

2. Assess Your Investor Status

Some investment opportunities in the Web3 space may be limited to accredited investors. According to the SEC guidelines, an accredited investor typically meets criteria based on income or net worth. However, Regulation Crowdfunding permits non-accredited investors to participate in early-stage investments, including some Web3 startups, subject to annual limits based on income or net worth.

Understanding your investor classification may help determine which opportunities are legally accessible to you.

3. Choose a Compliant Investment Platform

If investing through online portals, it is important to verify that the platform is registered with the SEC and a member of FINRA. These platforms generally follow required investor protections and provide standardized disclosures.

Crowdfunding platforms, such as StartEngine, operate under Regulation Crowdfunding (Reg CF), and offer access to startup equity investments, through regulated offerings. Investors should review offering materials carefully and confirm that the issuer is compliant with securities regulations.

Conducting Due Diligence in Web3

1. Project Fundamentals

Understand the project’s purpose, market opportunity, and business model. Consider how the technology provides value and whether the solution addresses a meaningful market need.

2. Technology and Ecosystem

Review the technical design, such as which blockchain the project is built on, how scalable it is, and how security and data integrity are handled. Open-source code, peer-reviewed designs, and active developer communities may indicate a higher level of maturity.

3. Tokenomics and Utility

If the project uses a native token, evaluate its supply, distribution, and use cases. Token models that are transparent and aligned with platform utility may better support the long-term viability of the business than speculative offerings with unclear value.

4. Team and Transparency

Consider looking for publicly available information about the founding team’s experience, development track record, and transparency in communication. Anonymous teams and unverifiable claims may introduce additional risks.

5. Legal and Regulatory Compliance

Determine whether the offering is structured as a security under U.S. law. Web3 projects that sell tokens may still be subject to securities regulations, depending on how the token is structured and sold. In some cases, token sales may trigger registration requirements or exemptions. Investors should confirm whether the issuer has filed relevant forms, such as Form C for Reg CF offerings.

Web3 Investment Vehicles

Regulation Crowdfunding Offerings: Some Web3 startups raise funds through regulated crowdfunding portals or platforms, making equity or tokenized securities available to the public.

Security Tokens: These are blockchain-based representations of ownership in a company or asset and are generally subject to securities laws.

DAOs: Individuals may gain exposure by participating in governance structures via token ownership, though the legal treatment of DAOs remains an evolving area and may present increased legal uncertainty and investor risk.

Funds and Syndicates: For those seeking diversified exposure, some investment funds offer pooled investment in Web3 startups, subject to accreditation and other restrictions.

Note: The investment vehicles described above are provided for informational purposes only and do not constitute a recommendation or endorsement of any specific method or product. Each approach involves varying degrees of risk, regulatory considerations, and suitability depending on an investor’s individual circumstances. 

Compliance Considerations

When investing in Web3-related opportunities, you may consider the following:

• Verify platform registration with the SEC and FINRA
• Review offering documents for accurate disclosures, including financials and risk factors
• Avoid unregulated offerings that make performance-based claims or appear to circumvent securities laws
• Monitor legal developments, especially with respect to token classification, DAO liability, and cross-border offerings

Due diligence, caution, and regulatory awareness are important when considering any Web3 investment.

Conclusion

Web3 technologies may offer investors access to decentralized innovations across finance, identity, and digital ownership. However, investing in Web3 requires thoughtful research, a clear understanding of associated risks, and compliance with U.S. securities regulations.

By using SEC-registered and FINRA-member platforms, reviewing transparent disclosures, and applying due diligence, investors can better understand and evaluate this emerging landscape.

Disclaimer: This article is for informational purposes only and does not constitute investment, legal, or financial advice. Investing in Web3 projects, tokens, or startups involves significant risks, including the potential loss of capital. Past performance is not indicative of future results. Investors should conduct their own due diligence and consult with qualified professionals before making any investment decisions. Investments made through crowdfunding platforms are subject to SEC and FINRA regulations, and investment limits may apply.

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