Have you even wanted to invest in a business startup? Ever wanted to put $1,000 in to help a really smart friend take their million-dollar idea and make it real? Well, you might be surprised to know that that is not really legal. Under the Securities and Exchange Commission’s complex set of laws, most people are non-accredited investors, and as such are not allowed to help fund new businesses, or any other ventures.
Who Can Invest?
However, some people are allowed to invest in startups. This lucky set is made up of accredited investors; people who make $200,000 for more per year (or $300,000 as a married couple) or who have more than $1,000,000 in assets. Everyone else, in the eyes of the SEC, is a non-accredited investor. These non- accredited folk cannot invest in startups or other ventures because of the high risk of fraud associated with this type of investment. Non-accredited investors, according to the SEC, cannot be trusted to know the difference between a good investment and a bad one. They have to be protected.
The JOBS ACT signed by President Obama this spring changes that. One of the key empowerments of the JOBS Act is that investors earning less than $100,000 a year can invest a maximum of $2,000 or 5% of their income, whichever is greater. If you make more than $100,000 you can invest up to 10% of your income.
This might seem like no big deal, but it is a sea change in investing. Right now only accredited investors can invest in startups. There is one exception to this limitation, but it is rarely used, and for good reason. The exception that lets non-accredited investors invest is in Regulation D of the Securities Act of 1933. Regulation D allows up to 35 non-accredited investors to invest money in what is called a “private placement”. Private placements are non-public offerings, typically available to only a small group of investors.
Non-Accredited Investors Aren’t Worth the Trouble
The trouble is, most startups don’t want non-accredited investors. That’s because it costs roughly $250,000 for a new company to get funding, after you pay filing fees and lawyers and go through all the paperwork and regulations required to make those non-accredited investments kosher. You’ve just spent nearly $250,000 in getting those 35 investors on board.
Now, remember, none of these small investors are worth more than $1,000,000 maximum. In the best-case scenario, you’re going to get maybe $50,000 each from them, and that’s a high estimate. That’s $1,750,000. It’s a healthy number certainly, but an institutional investor or venture capitalist can easily write a check for five to ten million.
Why bother with the filing, and managing and pleasing your 35 little investors, when you can get much more money from just one big donor? So most startups (large startups) do not bother with the small, non-accredited investors. The rules of the SEC have made it hard to work with them, and the returns just aren’t worth it compared to other funding sources.
The JOBS Act Changes 79 Years of SEC Laws
This is why the JOBS Act is such a big deal. It will break through all the archaic SEC laws and let the smaller investors in on the lucrative startup opportunities. What did not make sense before for startup owners (getting funding in little bits here and there) will suddenly be a viable option. Equity crowdfunding will allow non-accredited investors to play where once only the wealthy could play.
Though the JOBS Act has made it law that non-accredited investors will get to invest, at the time of this writing, only accredited investors have actually been given the go-ahead to participate in equity crowdfunding. The rest of us are waiting for the blessing of the SEC. Hopefully we won’t have to wait too much longer.