In our recent post, How You Can Start Investing in Startup Companies, we talked through some of the highlights of the JOBS Act and how you, as an average individual, get started building a portfolio of micro investments in small businesses and startups. Now that you have that down and begin making your first investments, here are some things you should know about equity crowdfunding:
- Anyone can invest
Before the Title III of the JOBS Act took effect back in May 2016, investing in privately held small businesses and startups was restricted to accredited investors. Becoming an accredited investor is no easy feat – amassing a net worth of more than $1 million or an annual income of $200,000 (or $300,000 if you’re married), meaning this type of investing was off limits to average people. With the new regulations, that changed.
- Investing can only take place on an SEC-registered platform that is also a FINRA member.
Based on regulations set forth in the JOBS Act, equity crowdfunding can only take place on a platform that is approved by and registered with the SEC and also a member of FINRA. The approval process for becoming an official platform is extensive and we are required to abide by many regulations in how we operate and market ourselves.
- The amount of money you can invest is based on your annual income.
Under the new regulations, there are restrictions in terms of how much money you can invest per year based on your annual income, but essentially anyone can invest at least $2,000 annually. According to the SEC,
“If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth. If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000.”
- All campaigns go through an approval process with the SEC.
Prior to launching an equity crowdfunding campaign and accepting investments, companies have to go through an approval process with the SEC. The process includes extensive paperwork and background checks. (We help walk our issuers through all this as it can be rather confusing). From the time documents are submitted to the SEC, approval usually takes about 21 days. During this time, companies can begin to market their campaign; however, the cannot begin accepting investments until after they receive approval from the SEC.
- Your money remains in an escrow account until the end of a campaign.
You may be wondering, once you decide to make an investment and enter your bank information, where does your money go? Great question. When a company sets up an equity crowdfunding campaign, the SEC requires a separate escrow account be established which will hold all investments until the end of the campaign. Assuming the campaign is successful and the company raised the minimum amount it set out to, the investments will be transferred to the company you chose to invest in and stock will be issued to you. If not enough investors decided to make a commitment, your funds will be returned to your account.
- You can invest in as many companies as you’d like.
While the amount of money you’re able to invest annually is limited by SEC regulations, the number of companies in which you can invest is not. This is really exciting, as you can start building your own diversified portfolio of micro investments in startups based on your interests and passions.
- You can (and we encourage you to) share your investment activities with your network.
After you make an investment, you might be excited to share the news with others – and you should! We strongly encourage our investors to share opportunities they find exciting with their networks. It helps the issuers further their campaigns and it also benefits you as a stakeholder in their success.
If you’re ready to make investments, check out some of our exciting campaigns!
If you still have questions about equity crowdfunding, reach out to us! We’re here to help.