Invest like a Venture Capitalist: Startup Investing thru Crowdfunding

Ever wished you could invest in startups?

Thanks to new SEC rules on equity crowdfunding, now you can. Prior to May 16, 2016, the only way for an investor to be able to invest in small startup companies was to be accredited. That meant that unless you had a million dollars in net worth or made hundreds of thousands of dollars a year, you couldn't invest in startup businesses.

 Click for the SEC Bulletin

Click for the SEC Bulletin

Investing through crowdfunding

Now, almost anyone can get in on early-stage startup companies looking for investors through Crowdfunding. The concept that brought you Kickstarter.com and GoFundMe.com is now making its way to equity financing for the masses. Through crowdfunding, business looking for up to $1,000,000 in investment capital will be matched up with small investors looking to invest.

"Crowdfunding generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people." - S.E.C. Bulletin

These are very small companies, so the chance for reward is huge, but the risk is equally massive. Before investing in crowdfunded startups, make sure to contact a professional financial adviser and read The Risks of Crowdfunding Investing.

Who can invest?

The SEC has opened the floodgates with their rule, allowing almost anyone to invest through crowdfunding. Unless something changes in the interpretation of the law (which it will when court cases start getting filed), everyone will be able to invest at least $2,000 per year in crowdfunded startups. 

How much can I invest?

The SEC limits the amount any person (or couple) can invest within a 12-month period. For most people, the maximum investment amount will be a few thousand dollars. People with less than $100,000 in net worth or annual income can invest at least $2,000. If your net worth or annual income is above $40,000 you can invest up to 5% of your income/net worth. 

For the slightly more wealthy, you can invest significantly more. Provided that you have both a $100,000+ net worth and a $100,000+ annual income, you can invest up to 10% of your income or net worth, whichever is the smaller amount.

 SEC-provided table of examples

SEC-provided table of examples

Additional Notes:

  1. A $100,000 cap is placed on investing no matter how much money you make or have. This cap also applies across all crowdfunding platforms, meaning that you can't invest extra by using multiple crowdfunding websites. If you want to invest more, you'll have to do it the old-fashioned way and get accredited. 
  2. The rule for the annual cap states 12-month period, not calendar year. Meaning if you invest to your max on June 12, you'll have to wait until next June 13 to start investing again.
  3. Couples can combine income and net worth for calculations, but that will subject the couple to the same limits an individual person has.
  4. These types of investments are high risk and highly speculative; make sure to consult a professional financial adviser to see what your limit is and how the SEC calculates net worth.

Learn More About Crowd Investing on PurposefulFinance.org

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