The SEC has ruled on Title III of the 2012 Jumpstart Our Business Starts Up Act (JOBS Act) and this is going to make a big impact on how small companies and real estate companies fund their projects in a major way. Previous to the change that we'll detail in a minute, there were rules on who could invest in these types of businesses or even if a business could advertise and sell securities to those that didn't meet the requirements. The rules only allowed those with an annual salary of $200k or more for the past two years ($300k if married) or those that have a net worth of $1M to invest in these types of venture loans. The people that met the standards were considered accredited investors.
One way to get around this was to provide a service or product as a reward for your support. So, you weren't really investing in the company, but rather just pre-production buying a product or just giving a gift. This is something that indiegogo, kickstarter and the like built their business models around and has allowed many small businesses access to free funding for their product or service. As you can see, you don't get a share of the company if you fund these projects.
Now to the new ruling from the SEC. The requirement to be an accredited investor has been lifted, but there are still restrictions. The restrictions are thus:
- Annual salary under $100k, limit of 2,000 or %5 of income (whichever is greater)
- Annual salary over $100k, limit of 10% of income
So, as you can see there is a lot of money out there for small businesses to now access. There is a limit of $1m annually that can be raised by a single company, so there are definitely still limits involved probably in an attempt to target start ups and other small ventures.
What does this really open up? What are the risks? Should you invest?
These are all the questions you should ask before considering investing now. You have to understand that the reason for the restrictions that were in place was an attempt to save us from our own stupidity. These are risky investments! If they weren't the company could have gotten a bank loan or even angel funding from venture capital firms with a lot of domain knowledge to help them evaluate a company's prospects. That means that a lot of these new opportunities are not going to go as well as the seller will try to convince investors. If you still see ads in your browser, expect to see more about investing in real estate. These rules were respected by the real estate community, but now that it is open season, there will be a lot of flippers/wholesalers out there looking for money. If you decide to invest be sure to do your homework and look for ways to get incremental payments or, if you get into real estate, get a lean on the property involved to help you get paid something if things go wrong.
I like the fact that we are no longer being legislated on what we can and can't do for our "own good." But with great power comes great responsibility, right? If you can't afford to lose it, don't invest it. This is a good mantra for the stock market, but it is even more so with these types of investments. Do your homework and good hunting.
References:
http://hackaday.com/2015/11/04/sec-allows-crowdfunding/
http://www.forbes.com/sites/navathwal/2015/10/30/the-secs-final-verdict-on-crowdfunding-and-how-it-impacts-you/
http://venturebeat.com/2015/10/30/u-s-sec-approves-new-crowdfunding-rules/
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