New law makes investing in startups available for the masses
Some excerpts from the article.
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The Securities and Exchange Commission voted to implement Title III of the Jumpstart Our Business Startups (JOBS) Act on Friday. Translation: It’s now legal for ordinary Americans to invest in startups and small businesses.
Unlike Kickstarter or GoFundMe, which allow you to invest in a product or idea like Spike Lee’s latest movie, the Keyboard Waffle Iron or potato salad and would in return get a token gift (or some potato salad), equity crowdfunding actually allows you to own a stake of the business. This could mean huge potential profits if the business succeeds or goes public; however, it could also result in steep losses.
Until now, you had to be an “accredited investor” to have equity in a private company. There are two ways to qualify -- and either way you have to be wealthy. Your income has to be at least $200,000 (or a combined $300,000 for married couples) in each of the prior two years. Second, eligible investors must have a net worth of over $1 million, either alone or together with a spouse (excluding the value of his or her primary residence).
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Title III has been the most problematic point for the SEC -- primarily because it opens up average Americans to the private investing world -- and is one reason that part of the law has languished for the past three-and-a-half years. Of the four SEC commissioners, only one, Michael Piwowar, dissented in Friday’s ruling: “I fear that many traps for the unwary are hidden in the regulations, creating potential nightmares for small businesses and their owners who fail to place regulatory compliance at the top of their business plans. Such burdens will spook many small businesses from pursuing crowdfunding as a viable path to raising capital.”
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The SEC has implemented caps for investors depending on income. If your income is $100,000 or less, you’re allowed to invest up to 5% of your income. Those earning more than $100,000 can invest up to $10,000.
“You can never make investing risk-free, but the SEC maximized transparency requirements. [Title III] is absolutely necessary for small businesses to expand and actually find responsible avenues to access capital,” said John Arensmeyer, CEO of advocacy organization Small Business Majority.
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Sapir told Yahoo Finance that this is the first time that customers can truly “get in on the action.” Whereas entrepreneurs have to perfect their pitches to venture capitalists, this new avenue of funding allows consumers to invest in a company that they already know and love. Perhaps this will allow startups to be less dependent on VC funding in the future.
He also noted that individuals do have a lot more at stake, compared to institutional investors like VC firms. “New technology is bound to fail. But VCs have the capacity to take a loss. Entrepreneurs have scammed investors before. A small investor without as many resources has no ability to protect himself.”
I know there are some ballers rolling in dough on this forums. What are your thoughts on this? I don't think the barrier should be based on wealth. It should be based on years of practice in the stock market. If someone can actually sustain a portfolio for five years, that may be a good enough amount of time to determine if this kind of investment is suitable for them.