Starting today, new rules that have taken years to complete allow qualified individuals to risk $2,000 a year or more by investing in small companies or startups in exchange for a stake in the business. Companies can “crowdfund” up to $1 million a year through this new method.
This marks a milestone in the growing sector of crowdfunding, and allows small-money investors to become budding venture capitalists — although it can be a risky proposition. Until now, only accredited investors, those with an annual income of at least $200,000 or a net worth of at least $1 million, have been permitted to take equity stakes in most private companies.
Now, investors with a net worth or annual income of less than $100,000 can take an equity position, but they are limited in how much they can invest in startups under the new rules of Title III of the JOBS Act. They can invest $2,000 or 5 percent of their annual income or net worth, whichever is less.
The law that made this possible was enacted with President Obama’s signature four years ago, but it took the Securities and Exchange Commission this long to finalize its rules, mostly to protect small investors from scam artists, bad ideas and a lack of knowledge about startups and risks tied to venture capital. The final version of the rules was released in October, running 685 pages.
“For start-ups and small businesses, this bill is a potential game changer,” Obama said when he signed the bill into law four years ago. “Right now, you can only turn to a limited group of investors — including banks and wealthy individuals — to get funding. Laws that are nearly eight decades old make it impossible for others to invest. But a lot has changed in 80 years, and it’s time our laws did as well.”