New Crowdfunding Rules Allow Ordinary Investors to Invest in Start-Ups

It recently because much easier for the average investor to invest in startups and for startups to raise money via crowdfunding efforts based upon rules promulgated by the U.S. Securities and Exchange Commission (SEC) that went into effect on May 16, 2016.  These changes were part of the JOBS Act, which was passed by Congress in 2012 to both assist startups in raising capital and allow ordinary investors access to investing in startups, which was previously not allowed under federal securities laws.  

Pursuant to what is known as Regulation Crowdfunding, a much broader class of investors can now invest in startups via a crowdfunding platform.  (Keep in mind any crowdfunding platform on which a startup intends to offer shares must be registered with the SEC in order to offer a platform upon which securities are offered for sale to the public.)  

Pursuant to Regulation Crowdfunding, there are limits on the amount that can be invested by an individual investor.  These limits are tied to the investor’s net worth and annual income.  Pursuant to the legislation, an investor’s net worth is calculated by subtracting any and all liabilities from the investor’s assets.  With respect to the actual concrete limits, if an investor’s annual income or net worth is less than $100,000, the investor can invest $2,000 or five percent of his or her net worth in a 12 month period, whichever is less.  If an investor’s annual income AND net worth are both greater than $100,000, then the investor is permitted to invest up to a maximum of ten percent of his or her income or net worth, whichever is less.  

There is also a limit of $1,000,000 that can be raised by any startup through crowdfunding in any 12 month period.  Each startup must disclose certain information in connection with any crowdfunding, including the price pursuant to which it is offering its securities to the public, the method of determining that price, a discussion of its financial condition, a description of its business, information about its officers and directors, as well as financial statements.

These recent changes to the federal securities laws permitted by Regulation Crowdfunding should prove beneficial for both ordinary investors, who now have access to an asset class they previously lacked the ability to invest in, while also making it easier for startups to raise money to fund and/or expand their businesses or to use for other purposes.