The process of raising capital online, through limited investments from a large pool of investors, is used by many small businesses today and is referred to as crowdfunding. With the Title III crowdfunding provisions of the JOBS Act, the Securities and Exchange Commission (SEC) has established rules that allow the general public to invest in capital raising efforts by startups. The rules that govern these crowdfunding activities are discussed below, along with important information that investors need to know about crowdfunding investment opportunities.
Subsequent to the JOBS Act, the SEC instituted Regulation Crowdfunding in order to implement the provisions that govern crowdfunding in the JOBS Act. The Financial Industry Regulatory Authority (FINRA) regulates crowdfunding portal registrations to make sure they adhere with FINRA rules and federal securities laws.
Who is Qualified to Invest?
Under Title III crowdfunding provisions, anyone is permitted to invest in crowdfunding offerings. However, there is a limit on the dollar value that may be invested in these securities during any 12 month period. Your annual income and net worth determine the inflation-adjusted investment limits.
- If your net worth and yearly income are equal to or greater than $107,000 then, during any 12 month stretch, you are permitted to invest a maximum of 10% of your net worth or yearly income (whichever is smaller) but that amount may not surpass $107,000.
- If your net worth or annual income is lower than $107,000, then within any 12 month period you may invest either $2200 or 5% of the lesser of your net worth or annual income (whichever is greater).
In the calculation of your net worth or annual income, you are permitted to use your spouse’s assets or income, even if the assets are not jointly held. However, if you take the joint calculation approach, the collective investment of you and your spouse may not be greater than the applicable limit for an individual investor at the same net worth or income level.
The Process of Investing
Per Title III crowdfunding requirements, only an online platform funding portal or broker-dealer may be used to invest in an offering governed by Regulation Crowdfunding. Companies must use one of these avenues – they are not permitted to offer crowdfunding investments to the investor by direct means.
In addition, the funding portal or broker-dealer must be properly registered with the SEC and a member of FINRA.